74 Columbia Law Review

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Citation: 74 Columbia Law Review 1139 1974
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A PROPOSAL FOR THE DESIGNATION OF
SHAREHOLDER NOMINEES FOR
DIRECTOR IN THE
CORPORATE PROXY
STATEMENTt
Corporations, 'enormously important in our society, are increasingly run
by managements who are free of effective control by any of those segments of
society vitally affected by corporate activities. This Note proposes a reform to
increase management accountability. The proposed reform entails increasing
the power of shareholders and the independence of the board of directors by
compelling management to designate shareholder nominees, within certain
limits, in corporate proxy materials.
Under the Proxy Rules presently promulgated by the Securities and Ex-
change Commission (SEC), a shareholder who wishes to solicit proxies
for his candidate for director must do so independently of the management-
controlled corporate proxy solicitation and at his own expense.1 He must also
comply with the disclosure provisions of Proxy Rule 14a-11. 2 The staggering
costs involved in waging a full-scale independent proxy contest in a publicly-
held corporation remove this device for shareholder expression from the reach
of all but the most affluent shareholders.3
At present, the only alternative to a full-fledged proxy contest is nomi-
nation from the floor at the corporation's annual stockholders meeting. This
alternative, however, is highly impractical. Shareholders generally do not, or
are unable to, attend the annual meeting. Moreover, by the time the meeting
is held, most stockholders have already committed their proxies and are be-
yond the point of seriously considering other candidates. 4 Management is
t This Note was presented to the Spring, 1974 Seminar on the Corporation in Modem
Society at Columbia Law School. The author wishes to express his appreciation for the
useful comments from student members and faculty alike. The author also wishes to
acknowledge and express his sincere thanks for the assistance and insights provided by
Professor Donald E. Schwartz, Georgetown Law Center.
1. Under certain circumstances, a successful insurgent candidate for the board may
be reimbursed for his campaign expenses. See, e.g., Rosenfeld v. Fairchild Engine &
Airplane Corp., 309 N.Y. 168, 173, 128 N.E2d 291, 293 (1955) (Froessel, J.) ; Stenberg
v. Adams, 90 F. Supp. 604, 607-08 (S.D.N.Y. 1950).
2. 17 C.F.R. 240.14a-11 (1973).
3. See note 148 and accompanying text infra.
4. [Before the] dispersion of the stockholders' interests throughout the country,
.... a stockholder might appear at the meeting and address his fellow stockholders.
Today he can only address the assembled proxies which are lying at the head of
the table. The only opportunity that the stockholder has today of expressing his
judgment comes at the time he considers the execution of his proxy form, and
we believe, . . that that is the time when he should have the full information
before him and ability to take action as he sees fit.
The proxy solicitation is now in fact the only means by which a stockholder
can act and can perform the functions which are his as owner of a corporation.
It, therefore, seems clear to us that only by making the proxy a real instrument
for the exercise of those functions can we obtain . . . "fair corporate suffrage."
1140 COLUMBIA LAW REVIEW [Vol. 74:1139
generally free, therefore, to nominate whomever it wants for the board of

directors without fear of any viable shareholder opposition.5
Designation of shareholder nominees in the corporate proxy statement
would permit a shareholder to sponsor a candidate for the board in a mean-
ingful, inexpensive manner. Shareholder nominations could be received by the
corporation and distributed to the shareholders with management's nominees
in the corporate proxy statement. All shareholders would then have the op-
portunity to consider all of the nominees before signing their proxy authoriza-
tions.
This Note will examine the utility of shareholder nominee designation as
a device for encouraging greater management accountability, the alternative
approaches toward adoption available to the corporate reformer and the
necessary procedures for successful implementation. The final section will ex-
plore the implications of shareholder nominee designation for an expansion of
corporate social responsibility and the difficulties of extending this proposal to
corporate-affected constituencies other than shareholders.
I. MANAGEMENT UNACCOUNTABILITY AND A PROPOSED REFORM
A. Corporate Model and Reality

Under the well-established tenets of corporations law, the shareholders
of a corporation elect the board of directors. 6 Statutes uniformly charge the
board of directors with the responsibility of supervising management and
otherwise directing the affairs of the corporation.1 This theoretical model is
drastically at odds, however, with the reality of management's selection
of the board of directors and its unchecked control over corporate policies.
The theoretical chain of corporate authority has been reversed in practice,
with the course of corporate affairs set by the managers rather than the owners
-the shareholders or their representatives, the directors.
Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 [Proxy Rides] Before tie House
Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. 174-75 (1943) (remarks
of Ganson Purcell) [hereinafter cited as Hearings]. See also INVESTOR RESPONSIBILITY
RESEARCH CENTER, INC., SHAREHOLDER NOMINATION OF CANDIDATES FOR DIRECTOR 2
(Analysis No. 7 April 16, 1973) [hereinafter cited as IRRC, SHAREHOLDER NOMINATION].
5. In fiscal year 1972, proxy statements were filed pertaining to shareholders meetings
for the election of directors of 6,328 corporations. In all but 23 of these corporations,
management's nominees for the board of directors were elected without opposition. SEC,
THIRTY-EIGHTH ANNUAL REPORT OF THE SECURITIES AND EXCHANGE COMMISSION 30-31
(1972).
6. See, e.g., CAL. CORP. CODE 2200-01 (West 1955); DEL. CODE ANN. tit. 8,
211(b) (Supp. 1968); ILL. ANN. STAT. ch. 32, 157.34 (Smith-Hurd Supp. 1974); N.Y.
Bus. CoRP. LAW 703(a) (McKinney 1963); AMERICAN BAR FOUNDATION, MODEL Bus.
CORP. ACT ANN. 36 (2d ed. 1971). See also W. FLETCHER, CYCLOPEDIA OF THE LAW OF
PRIVATE CORPORATIONS 283 (rev. ed. 1969) [hereinafter cited as FLETCHER].
7. See, e.g., CAL. CORP. CODE 800 (West 1955) ; DEL. CODE ANN. tit. 8, 141 (a)
(Supp. 1968); ILL. ANN. STAT. ch. 32, 157.33 (Smith-Hurd Supp. 1974); N.Y. Bus.
CORP. LAW 701 (McKinney Supp. 1974); AMERICAN BAR FOUNDATION, MODEL Bus.
CORP. ACT ANN. 35 (2d ed. 1971). See also FLETCHER, supra note 6, 505.
1974] SHAREHOLDER NOMINEES
The key to shareholder control under the corporate model has always
been the board of directors. According to the model, shareholders, generally
too numerous and diversified in their interests to effectively participate in the
day-to-day direction of corporate affairs, select representatives charged with
the responsibility of running the corporation. Theoretically, the board of
directors must be independent of management control if it is to provide effec-
tive supervision of management conduct. The board's independence and its
ability to supervise and guide management, however, is severely undercut
by the reality of management, not shareholder, selection-a phenomenon
8
which has been recognized for at least forty years.
Exclusive management access to the corporate proxy statement, 9 par-
ticularly exclusive control over the designation of candidates' names in the
statement, is the key to management dominance.' 0 Although shareholders
are vested with the exclusive power to elect the board of directors, they are
denied, as a practical matter, the corollary right to nominate. Since the proxy
system is the modern substitute for the old shareholders meeting at which
management and shareholders enjoyed equal access to the nomination process,"
designation of candidates in the corporation's proxy statement is today's
equivalent of nomination. Management's exclusive control over the designation
of candidates-in effect, exclusive control over the nomination process-is
tantamount to the power to elect directors, 12 for the only alternatives open to
shareholders for presenting candidates are either too expensive or come too
late in the corporate electoral process. Shareholders must either incur signifi-
cant expenses in an effort to prepare, distribute and solicit their own proxy
statement, 3 or they must wait until the shareholders meeting and nominate
their candidates from the floor. Shareholder nominations at such meetings
are predictably empty gestures since most shareholders do not attend the
shareholders meeting, but vote their shares by proxy.14 Even where revocation
of proxy authorization is possible, 15 most shareholders have already committed
themselves to management's candidates and are unlikely to seriously consider
independent nominees.
Several other factors, in addition to management's exclusive access to
8. See A. BERLE & G. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 89
(1932) [hereinafter cited as BERL & MEANS].
9. SEC Proxy Rule 14a-8, however, has carved out a limited provision for shareholder
access to the corporate proxy statement through inclusion of appropriately submitted
shareholder proposals. See notes 47-67 and accompanying text infra. Nonetheless, manage-
ment retains exclusive control over the corporation's proxy materials for electoral purposes.
10. See note 4 spra.
11. Id.
12. Eisenberg, Access to the Corporate Proxy Machinery, 83 HARV. L. REV. 1489,
1504-06 (1970) [hereinafter cited as Eisenberg, Access to Proxy Machinery].
13. See note 148 and accompanying text infra.
14. See notes 4-5 and accompanying text swpra.
15. Proxies are generally revocable by the person authorizing them, see, e.g., N.Y.
Bus. CoRP. LAw 609(b) (McKinney 1963), though such revocation is rarely exercised.
the corporate proxy statement and the attendant inadequate shareholder op-
portunity to express preferences and scrutinize management policies, have
facilitated the insulation of managerial conduct from shareholder scrutiny.
The dispersion of the ownership of corporate wealth in the hands of numerous
investors with varying investments who are located throughout the country has
effected a long-heralded separation of corporate control from corporate owner-
ship. 16 Shareholders are generally removed from the corporations they own;
their orientation is not that of owners examining with care the operation of
their property, but rather that of creditors measuring their satisfaction in terms
of earnings per share and growth potential. Rather than independently examine
management's policies and practice, they will tend to defer to its expertise and
accept on faith its disposition of corporate resources. If earnings are poor or
growth potential unrealized or nonexistent, they will usually express their dis-
satisfaction by selling their shares.
Aside from management control of the corporate proxy statement and
shareholder orientations, other causes of management unaccountability include
the minimal efforts and interest of outside directors in the affairs of the cor-
poration,'17 the generally healthy long-term condition of the economy,' 8 and
the management-oriented, legal framework within which corporate affairs
are conducted. 19
As a result of this divergence of the reality of corporate affairs from the
model of shareholder control, the corporate structure no longer provides an
organic check on management conduct. Management, instead of being ac-
countable to a board of directors selected by, and responsive to, the share-
holders, is able to select and control the board. Shareholders are presently
denied any real input into the corporate decision-making process; they can
register dissent only by selling out of the corporation.2" Shareholder grievances
falling short of a desire to sell out are muted and denied any real impact on
management behavior. While management needs considerable freedom of
operation in order to make profitable use of corporate resources, the absence of
effective shareholder supervision through an independent board of directors
insulates management from needed early warning devices as to possibly un-
2
wise or unacceptable policies. '
16. See generally BERLE & MEANs, mupra note 8.

17. See Moscow, The Independent Director,28 Bus. LAw 9 (1972).
18. It remains to be seen whether the economy's present down swing will produce
an increase in the level of shareholder discontent with management.
19. See generally Cary, Federalism and Corporate Law: Reflections Upon Delaware,
83 YAi LJ. 663 (1974) [hereinafter cited as Cary, Reflections Upon Delaware].
20. The ineffectiveness of limiting shareholder input to selling out is scored by the
inability of certain groups of major investors, especially institutional investors, to readily
dispose of their holdings in response to unacceptable managerial conduct, thus dulling even
this ultimate check. See notes 39-41 and accompanying text infra.
21. The experience of the Penn Central railroad system illustrates the seriousness of
errors of judgment on the part of insulated managements and boards of directors. While
it is speculative to argue that early shareholder feedback would have saved the company
1974] SHAREHOLDER NOMINEES 1143
B. Managerialism
Managerialists essentially argue that management unaccountability pro-

vides management with the maximum flexibility to apply its expertise for the
good of the corporation. 22 A basic premise of the managerialist school is that
shareholders are only interested in profits regardless of the long-term impact
on the corporation. Only management, therefore, is in a position to advance
the long-range interests of the corporation and serve the public interest in the
viability of competitive economic enterprises. To the extent that management's
power and flexibility are diminished in favor of shareholder control, manage-
ment will be forced to sacrifice the long-term corporate welfare and the corre-
sponding public interest in order to preserve its tenure.2
Managerialists uniformly share a misguided, paternalistic attitude toward
shareholders: management, not the shareholders, knows what is best for the
shareholders. Aside from the question of the stockholders' proprietary right of
self-determination as the corporation's owners, there is good reason to believe
that the majority of shareholdings are controlled by economically sophisticated
investors quite capable of dealing with complex commercial and financial
problems. 24 Managerialists may tend to overstate the corporate manager's pro-
pensity to remain responsive to the needs and wishes of the corporate ownership
without actual direction and guidance.2 5 Although a considerable number of
corporate managers do remain accountable and responsive to their shareholders,
there is little assurance that management in general can be guided by, and re-
sponsive to, the shareholders without an institutionalized check and balance.
Ultimately, the managerialists may be faulted for their over-zealousness. Share-
holders would surely be ill-served by a management that simply polled the
shareholders on every decision; some flexibility is necessary. Undoubtedly,
shareholders will always seek strong management capable of exercising sound
judgment. But no management should be given a permanent license to operate
the corporation unchecked by shareholder guidance and direction.
from bankruptcy, early shareholder dissent might have triggered further investigation of
problems and prompted prophylactic steps.
22. Manning, CorporatePower and Individual Freedom: Some General Analysis and
ParticularReservations, 55 Nw. U.L. REv. 38 (1960) [hereinafter cited as Manning,
Corporate Power and Individual Freedom]; Manning, Book Review, 67 YALE L.J. 1477
(1958).
23. BERLE & MEANS, supra note 8, at 356; Manning, Corporate Power and Individual
Freedom, supra note 22; Manning, Book Review, 67 YALE LJ. 1477 (1958).
24. Eisenberg; The Legal Roles of Shareholders and Management in Modern Cor-
porate Decisioninaking,57 CALIF. L. REv. 1, 33-53 (1969) [hereinafter cited as Eisenberg,
Moder Corporate Decisionmaking] ; Emerson, Some Sociological and Legal Aspects of
Institutional and Individual Participation Under the SEC's Shareholder Proposal Rule,
34 U. DET. L.J. 528, 547-48 (1957) [hereinafter cited as Emerson].
25. Kaysen, The Corporation:How Much Power? What Scope?, in THE CORPORATION
IN MODERN SOCIETY 85, 104 (E. Mason ed. 1967). See also Mason, The Apologetics of
"Managerialism," 31 J. Bus. 1 (1958).
C. External Checks on Management

While management accountability is precluded by the absence of any
organic check, and exclusive reliance on managerial wisdom is illusory, sev-
eral external pressures exist that may effectively check and guide management
behavior.
1. Government Regulation. It has been suggested that government inter-
vention provides an opportunity for sensitive adjustments in the corporate
machinery that are necessary in the interest of corporate viability and the
public weal. By allowing public, rather than private, policymakers to set the
standards, the safeguards of the political process will preserve shareholder
investments in a manner most consistent with the public interest. In addition,
the imposition of standards of corporate conduct by the federal government
26
has the advantage of national uniformity.
Although government regulation has had a salutary impact in some in-
stances, 27 regulatory agencies have often fallen far short of fulfilling their
congressional mandate. 28 Government agencies have often become the pawns
of those they were intended to regulate. The success of corporate lobbying
efforts has often led to the institutionalization of the very policy inequities that
these agencies were intended to cure. 29 Moreover, government regulation with
its bureaucratic overlays frequently has the effect of reducing the efficiency of
private industry by ensnaring it in costly, protracted administrative proceed-
ings. Finally, government intervention is often contingent upon the occurrence
of crises and rarely takes the form of the ongoing supervision necessary to spot
and resolve problems before they cause economic disasters. The government
agency's response tends to come long after the time when effective standards
of corporate conduct should have been put into practice.
Nonetheless, the threat of government enforcement of legally prescribed
standards of fiduciary obligations undoubtedly encourages a certain degree of
corporate adherence to the legal norm. Perhaps the best that can be said for
government regulation as a vehicle for encouraging corporate accountability
is that it certainly has a role to play, but exclusive reliance upon it would
30
surely be misplaced.
26. For example, government regulation equitably imposed would obviate the neces-
sity for a corporation to incur a competitive disadvantage in order to satisfy its social
responsibilities.
27. For example, regulation has contributed to a higher standard of corporate social
responsibility. See Comment, Shareholder Participation Throubh the SEC's Proposal
Rule: Toward Corporate Responsibility, 4 CoLUm. HUMAN RIGHTS L. REv. 501, 507
(1972) [hereinafter cited as Shareholder Participation].
28. See generally, e.g., E. Cox, R. FELLMETH & J. SCHULTZ, NADER'S PAIDERS
REPORT ON THE FEDERAL TRADE CommIsSIoN (1969); R. FELLMETH, THE INTERSTATE
COMMERCE OMISSION: THE PUBLIC INTEREST AND THE ICC (1970); THE NADER STUDY
GROUP REPORT ON ANTITRUST ENFORCEMENT: THE CLOSED ENTERPRISE SYSTEM (M.
Green ed. 1971).
29. Hacker, Introduction: Corporate America, in THE CORPORATION TAKE-OVER 1,
10-11 (A. Hacker ed. 1964).
30. Shareholder Participation,supra note 27 at 507; Schwartz, The Public-Interest
2. Market Adjustment. Corporate behavior is in principle structured to

respond to the demands of the market place. Advocates of the market model
of decision-making boast that the market mechanism is the only effective means
for expressing dissatisfaction with corporate behavior and influencing corporate
managers. 3' If General Motors (GM) constructs unsafe automobiles, the
consumer is free to buy his car from a manufacturer of safer cars. To the ex-
tent that consumers in the aggregate express their dollar preferelnces, GM's
management will either alter its production policies to satisfy those pref-
erences, be replaced by managers who will, or go out of business. Similarly,
the market mechanism serves as a vehicle of shareholder discontent. Stock-
holders are free to register their dissatisfaction with corporate management
by selling their shares in the securities market. 32 To the extent that sufficient
shareholders sell their stock, the value of the corporate securities will be
deflated and management will become vulnerable through the "market for
33
control."
Unfortunately, this market model for corporate regulation has not proven
as efficient in practice as it has in theory. 34 Corporate responsiveness to con-
sumer demand is viable only in a purely competitive economy. Once the num-
ber of firms in the market has been reduced, corporate oligarchy permits cer-
tain firms by their sheer size to conduct their business relatively unchecked by
consumer preference. 35 Corporations have learned to create consumer demand
through psychological manipulation of consumer preferences.3 6 Moreover, the
market mechanism's insensitivity to external diseconomies, or "third party
costs," has operated to encourage socially irresponsible conduct.37 Even where
the market mechanism is fully operative, social costs will often still be
ignored. This is the inevitable result; the market is a function of individual
choices aggregated, and individuals do not always consider the consequences
of their collective judgment. 38
Proxy Contest: Reflections on Campaign GM, 69 MIcH. L. RFv. 421, 479 (1971) [herein-
after cited as Schwartz, Public-InterestProxy Contest] ; 116 CONG. REc. 4699-4700 (1970)
(statement by Ralph Nader) ; Ratner, The Government of Business Corporations: Critical
Reflections on the Ride of "One Share, One Vote," 56 CORNELL L. REv. 1, 37 (1970)
[hereinafter cited as Ratner].
31. See Friedman, The Social Responsibility of Business Is to Increase Its Profits,
N.Y. Times, Sept. 13, 1970, 6 (Magazine), at 32; Manne, Tire Myth of Corporate
Responsibility, 26 Bus. LAW. 533 (1970).
32. This approach is known as the "'Wall Street Rule': to invest in a company is
to invest in management and if one does not like what management is doing, one sells the
stock." Schwartz, Public-Interest Proxy Contest, supra note 30 at 495.
33. Manne, Mergers and the Market For Corporate Control, 73 J. PoL. EcoN. 110
(1965).
34. 116 CoNG. REc. 4699-4700 (1970) (statement by Ralph Nader).
35. See Shareholder Participation,supra note 27, at 507; Eisenberg, Modern Cor-
porate Decisionmnaking, supra note 24,' at 15.
36. Ratner, supra note 30, at 36. See also Schwartz, Towards New Corporate Goals:
Co-Exlstence with Society, 60 GEo. L.J. 57, 88 (1971) [hereinafter cited as Schwartz, New
Corporate Goals].
37. See KAPP, THE SOCIAL CosTs OF PRIVATE ENTERPRISE (1971); Schwartz, New
Corporate Goals, supra note 36, at 88.
38. This adverse result for society has been termed the "tyranny of small decisions."
1146 COLUMBIA LAW REVIEW[ [Vol. 74:1139
The market mechanism is equally unsatisfactory as a vehicle for share-

holder dissatisfaction. Stockholder disapproval of management conduct will not
always be fully expressed through the market. It is probably unrealistic to
expect stockholders to sell a profitable security over disagreement with par-
ticular management policies. Moreover, with the growing concentration of
corporate securities in the hands of institutional investors,3 0 large stock-
40
holders may find themselves at least partially frozen into their portfolio.
Furthermore, even if shareholders were willing to sell profitable securities
because of opposition to the policies of the issuer's management, their shares
will simply be bought up by individuals less concerned with those particular
policies. The problem of management unaccountability will remain; all that
has been accomplished is the exclusion of active, concerned shareholders from
41
an otherwise lethargic corporate electorate.
D. The Proposed Reform: Designation of Shareholder Nominees

Permitting the designation of shareholder nominees for the board of
directors in the corporate proxy statement should serve to promote greater
management accountability to shareholders. A shareholder's nominee might
actually be elected to the board. Although the probability of such an occur-
rence is slight, a well-known "celebrity" candidate or a nominee with a par-
ticularly telling critique of management behavior might attract sufficient
support in the corporation's proxy solicitation to win.
Even where there is no likelihood of electoral 4success, the mere availability
of the proposed reform should bring about a greater degree of management
accountability in a number of ways. In an effort to deflate any possible en-
thusiasm for shareholder nominees, management might seek to broaden the
diversity of background and viewpoints of its own candidates for the board
of directors and conduct its affairs in a manner more responsive to the needs
and desires of the corporate electorate. 42 Recognizing that designation of share-
holder nominees for director could produce a proxy ballot with candidates
presenting diverse interests and advocating various positions, management
might be encouraged to consider candidates for the board with an ability to
Kahn, The Tyranny of Small Decisions: Market Failures,Imperfections and the Limits of
Economics, 19 KyxLos 23 (1966). See P. SAMUELSON, EcomoMics 12 (8th ed. 1970).
39. IRRC, SHAREHOLDER NOMINATION, supra note 4, at 9-10; Schwartz, New Cor-
porate Goals, supra note 36, at 66; Ratner, supra note 30, at 26.
40. IRRC, SHAREHOLDER NOMINATION, supra note 4, at 10; Eisenberg, Modern Cor-
porate Decisionmaking, supra note 24, at 52-53; D. BAUM & N. STILES, THE SILENT
PARTNERS 80 (1965).
41. Schwartz, Public-Interest Proxy Contest, supra note 30, at 475-76.
42. See Eisenberg, Access to Proxy Machinery, supra note 12, at 1512; Caplin,
ShareholderNominations of Directors:A Program For Fair Corporate Suffrage, 39 VA.
L. REv. 141, 154 (1953) [hereinafter cited as Caplin, Shareholder Nominations of Direc-
tors] ; IRRC, SHAREHOLDER NOMINATION, supra note 4, at 7.
For a view that management sensitivity to the exercise of shareholder control has
potential vices as well as virtues, see Adkins, Corporate Democracy and Classified
Directors,11 Bus. LAw. 31, 34-35 (1955).
understand, and a willingness to serve, the interests of a broader gamut of

shareholder groups. The danger, of course, is that management will alter its
own behavior only to the extent necessary to create the appearance of respon-
siveness. Ongoing shareholder vigilance, supplemented by future nomination
drives, is the best safeguard against such "window-dressing."
Second, provision for designation of shareholder nominees in the corporate
proxy statement will create a new forum for the discussion of corporate prob-
lems and policies. Shareholders will be afforded an opportunity to communicate
to their fellow owners their views of the proper course of corporate action.
By presenting an alternative to the incumbent's policy and programs, share-
holder nominees will compel management to articulate justifications for its
conduct. Not only will shareholders become better informed about the views
of other shareholders and the reasons for management actions, but manage-
ment will hopefully become more aware of the flaws in its own policies and of
the previously unarticulated needs and perspectives of the shareholders. The
experience of past shareholder proposal campaigns offers support for the
belief that even unsuccessful shareholder efforts will encourage a healthy
43
dialogue and produce responsive management actions.
Finally, designation of shareholder nominees in the corporate proxy
statement may serve to encourage management to adhere more strictly to its
duty of care and other fiduciary obligations. While the standards of duty of
care are statutorily defined with various subtleties, 44 they are of little conse-
quence in light of the courts' general unwillingness to impose liability on
corporate managers for breach of their duties of care in the absence of evidence
of self-dealing. 45 By their "business judgment" gloss to the statutory duty of
care standard, the courts have effectively immunized corporate directors and
officers for a wide range of business errors which are supported by some argu-
ably reasonable business motivation. 4 6 Many of these cases can be explained by
43. Two recent examples of positive management reaction to unsuccessful shareholder

proposal campaigns have occurred in General Motors and Levi Strauss corporations. In
1970 Campaign GM lost its proxy fight to expand the board of directors and add an en-
vironmentalist, a women's rights-consumer advocate and a black community leader. Al-
though the GM management prevailed, a responsive cord was apparently struck. Within
the year GM filled a vacancy on the board with a black community leader of comparable
stature to the Campaign GM nominee. See Schwartz, New Corporate Goals, supra note
36, at 59-60. In 1973 Levi Strauss defeated a shareholder proposal for designation of
shareholder nominees. Levi Strauss has subsequently indicated a willingness to adopt such
a proposal and has taken some tentative steps in that direction. See note 65 infra.
44. Compare N.Y. Bus. Coap. LAw 717 (McKinney 1963) -("that degree of dili-
gence, care and skill which ordinarily prudent men would exercise under similar circum-
stances in like positions"), with PA. STAT. ANN. tit. 15, 1408 (Purdon's 1967), amended,
PA. STAT. ANN. tit. 15, 1408 (Supp. 1974) ("that diligence, care and skill which ordi-
narily prudent men would exercise under similar circumstances in their personal business
affairs"). See Solheimer v. Manganese Corp. of America, 423 Pa. 563, 224 A.2d 634
(1966). See also Adkins & Janis, Some Observations on Liabilities of Corporate Directors,
20 Bus. LAW. 817 (1965).
45. See Bishop, Sitting Ducks and Decoy Ducks: New Trends in the Identification of
Corporate Directors and Officers, 77 YALE L.J. 1078 (1968).
46. See HENN, CORPORATIONS 233, 242 (1961) ; FLETcHER, supra note 6, 1039.
the state courts' fear that too strict a standard of care would discourage cor-
porations from incorporating in the state and honest men from serving as
directors. However understandable this fear, the result of this judicial develop-
ment has been that the threat of civil liability provides slight encouragement
for managerial adherence to its fiduciary obligations. The fear of exposure and
the necessity to defend prior acts as well as the risk of ouster may encourage
the board of directors to exercise their independence and best judgment in
determining corporate affairs.
II. APPROACHES TOWARD ADOPTION OF DESIGNATION OF

SHAREHOLDER NomINEEs PROPOSAL
For the corporate reformer, an analysis of the alternative approaches to

adoption of the designation of shareholder nominees proposal involves con-
siderations of sources of authority, tactics and strategy, and opportunities for
comprehensive application. The following discussion will suggest four ap-
proaches toward adoption and weigh the relative advantages and disadvantages
of each.
A. Shareholder Proposal
One approach available to all shareholders without additional authoriza-
tion from legislative, private, or administrative bodies would be to submit a
proposal for amending the certificate of incorporation and/or bylaws to per-
mit the designation of shareholder Ilominees in the corporate proxy statement.
In accordance with SEC Proxy Rule 14a-8 47 a corporation is required to
include in its proxy statement any shareholder proposal, provided it is sub-
mitted in a timely fashion48 and the shareholder states that he intends to
introduce the proposal for the shareholders' consideration at the annual meet-
ing.49 If management opposes the adoption of the shareholder proposal, the
shareholder is entitled to submit a two-hundred word statement in support of
his proposal. 50
Under subsection (c) of Rule 14a-8, management may omit the share-
holder's proposal from the corporation's proxy statement for the following
reasons: (1) the proposal is not a "proper subject" for shareholders under
applicable state laws ;51 (2) the proposal relates to a matter that is "not sig-
nificantly related to the business of the issuer or is not within the control of
the issuer ;-152 (3) substantially the same proposal has been submitted within
47. 17 C.F.R. 240.14a-8 (1973).
48. Subsection (a) of Proxy Rule 14a-8 requires that the proposal be received not
less than 70 days prior to the date corresponding to the day that management mailed its
proxy materials for the prior annual meeting. Id. 240.14a-8(a).
49. Id.
50. Id. 240.14a-8(b).
51. Id. 240.14a-8(c) (1).
52. Id. 240.14a-8(c) (2) (ii).
the past five years and has failed to receive a certain percentage of the votes
cast;53 and (4) the proposal requests that management take action on a
"matter relating to the conduct of the ordinary business operations" of the
corporation.5 4 While these grounds for omission should not be disregarded, 55
they are not likely to bar the designation of shareholder nominees proposals.
The first, second and fourth obstacles clearly do not apply to a proposal aimed
at the mode of shareholder selection of directors. Moreover, the success that
proposals seeking to amend the bylaws to permit designation of shareholder
nominees in the corporate proxy statement have had in being presented in the
proxy statement over the last twenty-five years56 suggests that these obstacles
are not insurmountable.
The shareholder proposal approach would provide certain advantages
over other approaches to adoption. It would seem to be the best route to
achieve the most publicity for such issues as shareholders' rights, an inde-
pendent board of directors and corporate social responsibility. Distribution of
the shareholder proposal ih the proxy statement of a large corporation could
reach over one million people directly.5 7 Even if the shareholder proposal fails
to carry in a particular corporation, the publicity that only this approach can
generate may be a vital first step towards developing the public interest and
support necessary to achieve adoption by a subsequent legislative action.58
The shareholder proposal approach has the further advantage of accommo-
dating the specific procedures for implementation to the characteristics of the
corporation involved. Procedures for implementation can generate complex
problems ;59 adoption on a more comprehensive scale would of necessity require
sacrificing the benefits of individually tailored procedures.60
53. Id. 240.14a-8(c) (4).

54. Id. 240.14a-8(c) (5).
55. The question of when a corporation may omit a shareholder proposal has trig-
gered a sizeable body of case law and inspired an equally awesome array of legal com-
mentary. See SEC v. Transamerica Corp., 163 F.2d 511 (3d Cir. 1947), cert. denied, 332
U.S. 847 (1948); Peck v. Greyhound Corp., 97 F. Supp. 679 (S.D.N.Y. 1951); Clus-
serath, The Amended Stockholder Proposal Rule: A Decade Later, 40 NOTRE DAME LAW.
13 (1964) ; Bayne, Caplin, Emerson & Latcham, Proxy Regulation and the Rule-Making
Process: the 1954 Amendments, 40 VA. L. REv. 387 (1954) ; Emerson & Latcham, The
SEC Proxy Proposal Rule: The Corporate Gadfly, 19 U. CHI. L. REv. 807 (1952)
[hereinafter cited as Emerson & Latcham]; Shareholder Participation, supra note 27;
INVESTOR RESPONSIBILITY RESEARCH CENTER, INC., SEC RulE 14a-8 AND THE SHARE-
HOLDER RESOLUTION (Special Report No. 2, 1973).
56. During this period, such proposals were included in the proxy statement of at least
five different corporations: Illinois Central Railroad Co., 1949, see note 95 infra;
General Motors Corp., 1971, see note 61 infra; International Business Machines Corp.,
1973, see note 62 infra; Xerox Corp., 1973, see note 62 infra; Levi Strauss & Co., 1973,
see note 62 infra.
57. The experiences of Campaign GM demonstrates the considerable publicity value
of this approach. See Schwartz, Public-Interest Proxy Contest, supra note 30, at 425
n.24, 427 n.32.
58. IRRC, SHAREHOLDER NOmINATION, supra note 4, at 3.
59. See notes 93-153 and accompanying text infra.
60. Caplin, Proxies, Annual Meetings and CorporateDemocracy: The Lawyer's Role,
37 VA. L. REv. 653, 687 (1951) [hereinafter cited as Caplin, Proxies].
If corporate reformers use the shareholder proposal approach, tactical

considerations require selection of either of two alternative tactical routes. The
shareholder may submit a proposal which includes the detailed procedures for
implementation, 6' or he may submit a proposal which seeks shareholder sup-
port for the general principle of shareholder access to the corporate proxy
material but permits management to work out the specific details. 0 2 A gen-
61. For example, the Project on Corporate Responsibility submitted the following
proposal at the 1971 shareholders' meeting of the General Motors Corp.:
Resolved: that a new by-law under the title "Board of Directors" be adopted as
follows:
A. Nomination.
1. Directors shall be elected from among those candidates nominated for
the Board in accordance with these by-laws.
2. Nomination for members of the Board may be made by the Board of
Directors or any shareholder, either by notice to the Secretary of the Corpora-
tion no later than March 1, or at the annual meeting. These by-laws may contain
provisions for other methods of nominating candidates for the Board. All candi-
dates nominated by notice to the Secretary shall be included in the Corporation's
proxy statement as set forth in paragraph B below.
B. Inclusion in Proxy Statement.
1. All candidates entitled to be included in the proxy statement and proxy
furnished by the Corporation to the shareholders shall appear in one list in alpha-
betical order in both such documents.
2. Nomination by Management: All candidates, not in excess of the number
of Directors to be elected, and subject to any other provisions in these by-laws,
nominated by the Board of Directors, or by the Directors or Officers of the
Corporation, directly or indirectly, shall be listed on the proxy statement and on
the proxy.
3. Nomination by Shareholder: Candidates nominated by a petition signed
whether by (1) 100 shareholders of record or beneficial owners as of the date of
such petition, or by (2) the holders of record, or the beneficial owners, as of the
date of such a petition, of 1,500 shares of the Corporation's stock entitled to vote
at the meeting shall be listed on the proxy statement and on the proxy, subject to
the limitations set forth in this paragraph. No petition may propose the candidacy
of more than three persons, and no person may sign more than one such petition
with respect to any election. Upon receipt of the nominating petition, the Secre-
tary of the Corporation shall seek to obtain from each such nominee a document
indicating his consent to be a candidate and the information required under law
to be included in a proxy statement. If the nominee fails to furnish such consent
or information within 14 days after receipt of the Secretary's request, he shall
not be listed in the proxy statement. In the discretion of the candidate, a 100
word statement in support of such candidacy shall be included in the proxy
statement with respect to each candidate whose name is included. If the number
of persons nominated by petition exceeds 30, the Secretary, having due regard
for the purpose of this by-law and for the number of individual shareholders or
number of shares represented in each petition, may limit the number of such
candidates whose names are included in the Corporation's proxy statement to 30,
by any reasonable method, such as timeliness, mutual consent of nominators or
candidates, lot, or other such reasonable method. No Officer or Director of the
Corporation may sign a petition or participate in the circulation of any petition.
C. Election.
1. Shareholders shall vote for candidates individually, whether they vote
in person or by proxy. No proxy furnished or solicited by management may confer
discretionary authority in any agent to vote with respect to candidates. Votes,
whether cast in person or by proxy, shall be counted only with respect to those
candidates specifically indicated by the shareholder.
GENERAL MOTORS CORP., NOTICE OF ANNUAL MEETING OF STOCKHOLDERS AND PROXY
STATEMENT 31-32 (April 5, 1971), on file at Columbia Law Review [hereinafter cited as
GM, PROXY STATEMENT 1971].
62. For example, the Project on Corporate Responsibility submitted the following
proposal at the 1973 shareholders' meetings of the IBM, Xerox, and Levi Strauss cor-
porations:
SHAREHOLDER NOMINEES 1151
erally-worded shareholder proposal avoids shareholder confusion over details

and helps to focus attention on the principles involved, and gives management
the added flexibility of being able to work out the procedures for implemen-
tation itself. 63 The opposing argument for the "detailed procedures" approach
is that it prevents management from circumventing the shareholder mandate
by designing procedures which give the appearance of implementing the right
to designation of shareholder nominees while substantially curtailing the prac-
tical effect of the reform.
The shareholder proposal approach toward adoption, however, presents
serious drawbacks. While the prospects for getting the proposal included in
the proxy statement are relatively favorable, the probability that a majority of
shareholders will vote for its adoption is slim.6 4 No shareholder proposal
submitted under Rule 14a-8 is ever likely to receive a majority of the share-
holders' votes when management has formally opposed it in the proxy state-
ment. Nevertheless, management may very likely reconsider its opposition to
any shareholder proposal that demonstrates significant shareholder support.6 5
A significant shareholder endorsement may persuade management, if it wishes
to eliminate a source of potential opposition, to adopt some provision to accom-
plish the proposal's purpose.
In addition to the slim prospects of electoral success, this approach can be
Resolved: That the shareholders recommend that the Board of Directors amend
the by-laws of the Corporation relating to the nomination and election of Direc-
tors, to establish a procedure whereby the Corporation's shareholders may submit
nominees for the Board of Directors to be included on the Corporation's proxy
statement.
IBM, NOTICE oF 1973 ANNUAL MEETING AND PROXY STATEMENT 30 (March 16, 1973),
on file at Columbia Law Review [hereinafter cited as IBM, PROXY STATEMENT 1973] ;
XEROX, PROXY STATEMENT 26 (April 19, 1973), on file at Columbia Law Review [here-
inafter cited as XEROX, PROXY STATEMENT 1973] ; LEVI STRAUSS & Co., PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS TO 3E HELD ON APRIL 5, 1973, at 8 (March 5,
1973), on file at Colhnbia Law Review [hereinafter cited as LEVI STRAusS, PROXY
STATEMENT 1973].
63. This opportunity for flexible implementation by management undercuts one of
its recurring objections to the proposal, that of unwieldiness. See Letter from Bud Johns,
Public Relations Director, Levi Strauss & Co. to the author, February 5, 1974, on file
at Columbia Law Review [hereinafter cited as Bud Johns Letter]; GM, PROXY STATE-
MENT 1971, supra note 61, at 34; XEROX, PROXY STATEMENT 1973, supra note 62, at 27;
IBM, PROXY STATEMENT 1973, supra note 62, at 31.
64. All of the shareholder proposals listed in note 56 supra received less than 10
percent of the votes cast.
65. The 1973 proxy statement for Levi Strauss & Co. included a shareholder pro-
posal concerning the designation of shareholder nominees for director in the corpora-
tion's proxy statement. See LEVI STRAUSS, PROXY STATEMENT 1973, supra note 62, at 8.
While the resolution was defeated, it did receive the support of 9.3% of the shares voted.
LEvi STRAUSS & Co., ANNUAL MEETING-APRIL 5, 1973, SAN FRANCISCO 3 (unpagi-
nated), on file at Columbia Law Review [hereinafter cited as LEVI STRAusS, ANNUAL
REPORT 1973]. Management has subsequently indicated that it is giving serious considera-
tion to establishing some procedure along the lines of the proposal. See Bud Johns Letter,
supra note 63. See also Letter from Donald E. Schwartz to Walter A. Haas, Jr., Chair-
man of the Board, Levi Strauss &-Co., July 6, 1973, on file at Columbia Law Review
[hereinafter cited as Donald E_ Schwartz Letter].
See also Schwartz, New Corporate Goals, supra note 36, at 59-60, for the positive
results, notwithstanding slight shareholder support, of the Campaign GM 1970 proxy con-
test efforts.
1152 COLUMBIA LAW REVIEW[ (Vol. 74:1139
faulted for its limited impact. Those corporations which are not subject to
the Securities Exchange Act and the SEC Proxy Rules promulgated there-
under would be immune to reform. 66 Furthermore, with respect to those cor-
porations which come under the ambit of the Proxy Rules, the shareholder
proposal approach would require organizing a separate proxy campaign effort
for each corporation. Even where such a campaign succeeds, all that has been
achieved is the reform of a single corporation. The individualized impact of
this approach would enable management to raise the spectre of competitive
disadvantage. Management could argue that adoption of such a proposal would
potentially reduce their corporation's efficiency and place it at a competitive
disadvantage with other corporations not subject to the added shareholder
67
influence and "interference" that adoption will entail.
While the shareholder proposal approach allows the procedures to be
tailored to the specific circumstances of the corporation, the procedures would
be applied only to one corporation. Though a campaign for a shareholder pro-
posal in a large corporation could arouse great public interest, the prospects of
successful adoption are slim and largely dependent upon management's mag-
nanimity.
B. State Law
A second approach would be to seek a change in the law of the state of
incorporation. The problem here is the state lawmakers' willingness to adopt
this provision. State corporations law has marked a course of diminishing
control and restrictions over corporations and corporate management.08 The
fear that corporations will respond to legislative restrictions on the power of
corporate management by reincorporating elsewhere-the so-called "Delaware
syndrome"-has discouraged states from instituting any significant corporate
reform. 69
Notwithstanding Professor Eisenberg's compelling argument that state
corporations law requires that shareholders be permitted to designate candi-
dates for the board in any corporate proxy statement," it is unlikely that any
66. Securities Exchange Act of 1934 12(a), (g), 15 U.S.C. 781(a), (g)
(1970). See also 17 C.F.R. 240.14a-2 (1973).
67. See fiote 26 supra.
68. See, e.g., W. CARY, CASES AND MATERIALS ON CORPORATIONS 9-13 (4th ed. 1969)
[hereinafter cited as CARY, COR'ORATIONS] ; Comment, Law for Sale: A Study of tile
Delaware Corporation Law of 1967, 117 U. PA. L. REv. 861 (1969) ; Dodd, Statutory
Developments in Business Corporation Law 1886-1936, 50 HARv. L. REv. 27 (1936);
Rutledge, Significant Trends in Modern Incorporation Statutes, 22 WASH. U.L.Q. 305
(1937) ; Luce, Trends in Modern Corporation Legislation, 50 MicH. L. REV. 1291 (1952) ;
Katz, Tie Philosophy of Mid-century Corporation Statutes, 23 LAw & CONTEMP. PROB.
177 (1958) ; Latty, Why Are Business Corporation Laws Largely "Enabling"?, 50
CORNELL L.Q. 599 (1965); Folk, Corporation Statutes 1959-1966, 1966 DUKE L.J. 875.
69. For a review of the consequences of the states' "race to the bottom"-the states'
destructive race to impose the least control upon corporations, see Cary, Reflections Upon
Delaware, supra note 19.
70. See Eisenberg, Access to Proxy Machinery, supra note 12, at 1502-11.
state court would so hold. 71 Even if a state court ruled that shareholders are
entitled to designate candidates in the corporate proxy material, corporate
management would still have several options besides compliance. It might be
able to persuade the state legislature to restore by statute the sovereignty of
management.7 2 If the state legislature proved unwilling or unable to undo the
court ruling, management could conceivably reincorporate elsewhere if it suffi-
ciently feared shareholder access to the proxy machinery. The possibility of
reincorporation ultimately undercuts the utility of corporate reform by the
state law approach.
C. New York Stock Exchange Listing Requirements

A third approach would be to seek an amendment to the Company
Manual and listing agreements of the New York Stock Exchange.7 3 Every
listed corporation enters into a listing agreement with the Exchange, in which
it promises to adhere to the Company Manual. The Exchange, through its
Company Manual, develops new requirements "in pace with the development of
public policy in the fields of corporation finance and management, and in the
fields of stockholder relations and accounting."7 4 Since the Company Manual
deals with such issues as proxies and stockholders' meetings, 75 although not
as extensively as the Proxy Rules, there is little doubt that the New York
Exchange could, if it were so inclined, establish a requirement for designation
of shareholder nominees in the corporate proxy statement.
It is not likely, however, that the Exchange would take the lead in this
area of corporate reform. The Exchange's declared policy on imposing new
requirements has been conservative, one of gradual evolution.76 Furthermore,
the Exchange represents the listed corporations, and is only theoretically re-
sponsive to the public. Unlike the corporation where a shareholder may initiate
a 14a-8 proposal, or the SEC where members of Congress can encourage con-
sideration of proxy rule revisions, there is no comparable source available.
71. Professor Eisenberg's 1970 article failed to cite a single case on point in support
of his thesis that existing corporations law entitles shareholder nominees for director to
designation in the corporation's proxy material. Eisenberg, Access to Proxy Machinery,
supra note 12. This author has been unable to discover any case based on the rationale
presented in Eisenberg's article.
72. See, e.g., Cary, Reflections Upon Delaware, supra note 19, at 689.
73. This approach was originally developed by the Project on Corporate Respon-
sibility.
74. N.Y. STOCK EXCHANGE, COMPANY MANUAL A-27.
75. Id. at A-129 to A-148.
76. New requirements have been added only as the need for remedial measures
and the appropriate, practical means of applying those measures become evident,
or as they become useful in promotion of a trend toward improved practice
among leading corporations. It has been gradual because the Exchange, through
the years, as now, has been loath to adopt any new requirements affecting
listed companies until that requirement has been proved to be not only sound in
principle, and an advancement of public interest, but thoroughly workable, as
well.
Id. at A-27.
within the Exchange to take the initiative and generate the momentum neces-
sary for the adoption of such a reform. Even should the Exchange adopt such a
provision in its Company Manual, listed corporations would only gradually
be obligated to conform as they renewed their listing agreements. 7 On the
other hand, it is not likely that a corporation would delist in order to retain
the corporate proxy machiner] within management's exclusive domain. Thus,
adoption by this approach would extend the proposed reform to the largest
corporations in the country without providing a debilitating escape route
analogous to reincorporation in the state law approach.
D. SEC Proxy Rules

The fourth avenue to adoption is a revision of the Proxy Rules promul-
gated by the SEC under section 14(a) of the Securities and Exchange Act of
1934.78 Under this approach, should the SEC endorse the designation of
shareholder nominees proposal, it would release for comments a proposed
amendment to the Proxy Rules. If not persuaded to alter its course, the
79
Commission would adopt the proposal.
77. Id. at A-28. Cf. Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518
(1819).
78. 15 U.S.C. 78n(a) (1970).
79. In 1942, the Commission released a proposed amendment to the rules requiring
designation of shareholder nominees for circulation and comment. See SEC Securities
Exchange Act of 1934 Release No. 3347, at 2 (Dec. 18, 1942). The proposed Rule
X-14a-2(b) provided:
No authority shall be sought to vote a proxy upon the election of any person
to any office for which a bona fide nominee is not named in the proxy state-
ment. The name of each nominee of the persons making the solicitation shall be
set forth in the form of proxy in such a manner that the person solicited can
strike out the name of a nominee for whom he does not wish to vote. In the
event a security holder has notified the management pursuant to Item 5 (M) of
Schedule 14A of an intention to nominate and support a nominee or nominees
the name of each such nominee shall also be set forth in the form of proxy to-
gether with a form of ballot in which the person solicited can indicate that he
wishes his securities voted for such nominee and a statement to the effect that
the proxy may be voted for the election of the nominees proposed by the manage-
ment unless the person solicited indicates he wishes his securities voted for another
nominee or other nominees and specifies the nominee or nominees proposed by
the management for whom he does not wish his securities voted. In the event that
security holders notify the management of an intention to nominate and support
more than twice as many nominees as there are directors of the issuer, the
management may select, on any equitable basis, name and furnish the required
information concerning only twice as many nominees as there are directors. [A
general provision to the same effect is proposed in cases where auditors are
elected by stockholders.]
Hearings,supra note 4 at 36. The proposed Schedule 14A, Item 5 (M) provided:
In the event that a security holder of the issuer has notified the management
at least 30 days prior to the date on which the soliciting material is scheduled
for release to security holders that he intends to nominate and support a nominee
or nominees and has furnished the management with the information called for
by paragraphs (E), (F), and (I) with respect to each such nominee, name such
nominee or nominees, set forth the information called for by paragraphs (E),
(F), and (I) which has been furnished, name the security holder proposing to
nominate and support such nominee or nominees and state the approximate amount
of each class of securities of the issuer beneficially owned by him.
Id. at 42. The proposal was subsequently abandoned, according to SEC Chairman Ganson
Purcell's testimony during the 1943 hearings of the House Committee on Interstate and
Consideration of this administrative route to adoption requires an exami-

nation of the scope of the rule-making authority granted to the SEC. It may
be anticipated that any effort by the SEC to impose this requirement on all
non-exempted securities issuers would be challenged as beyond the congres-
sional grant of rule-making authority to the SEC. 0 Section 14(a) authorizes
the Commission to prescribe such rules and regulations as "necessary or appro-
priate in the public interest or for the protection of investors .... ,,81 Com-
mentators have read this as indicating a congressional intent to grant a broad
rule-making authority to control proxy solicitation.8 2 The legislative history
83
speaks generally of the SEC's mandate to ensure informed shareholder action
and "fair corporate suffrage"8' 4 through regulation of the proxy system. There
is no evidence in the legislative materials of a congressional intent to impose
restrictions on the Commission's rule-making authority to control proxy
solicitation. The courts have similarly adopted a broad interpretation of the
Commission's power to regulate the proxy system in order "to require fair
opportunity for the operation of corporate suffrage.18 5
The SEC has had the opportunity to submit its own interpretation of the
scope of its rule-making authority under Section 14(a).86 During the 1943
Hearings of the House Committee on Interstate and Foreign Commerce, SEC
Chairman Ganson Purcell indicated that Proxy Rule 14a-8 concerning share-
Foreign Commerce, because of comments received that it would prove burdensome and
impractical. See Hearings,supra note 4, at 161.
80. The 1942 proposed amendments regarding designation of shareholder nominees,
see note 79 supra, were challenged on these grounds. Hearings, supra note 4, at 153, 157
(memorandum submitted by Lewis H. Brown).
81. 15 U.S.C. 78n(a) (1970). Although the precise question here is the scope
of authority available under section 14(a), additional authority for the adoption of
proxy rules may be found in section 23(a), which authorizes the Commission with the
"power to make such rules and regulations as may be necessary for the execution of the
functions vested in" it by the Act. Id. 78w(a) (1970). In setting forth its most recent
amendments to the proxy rules the SEC relied on its authority "pursuant to Exchange
Sections 14(a) and 23(a), . . ." See Adoption of Amendments to Proxy Rules, SEC
Securities Exchange Act of 1934 Release No. 9784, at 1 (September 22, 1972). See also
SEC Securities Exchange Act of 1934 Release No. 4775, at 2 (December 2, 1952).
82. Caplin, Shareholder Nomination of Directors, supra note 42, at 155. But see
Hearings, supra note 4, at 153.
83. In order that the stockholder may have adequate knowledge as to the manner
in which his interests are being served, it is essential that he be enlightened
...as to the major questions of policy, which are decided at stockholders'
meetings .... The committee recommends that the solicitation and issuance
of proxies be left to regulation by the Commission.
S. REP. No. 792, 73d Cong., 2d Sess. 12 (1934).
84. Fair corporate suffrage is an important *right that should attach to every
equity security bought on a public exchange. Managements of properties owned
by the investing public should not be permitted to perpetuate themselves by the
misuse of corporate proxies.... [T]he proposed bill gives the . . . Commission
power to control the conditions under which proxies may be solicited with a
view to preventing the recurrence of abuses which have frustrated the free
exercise of the voting rights of stockholders.
H.R. REP. No. 1383, 73d Cong., 2d Sess. 13-14 (1934).
85. SEC v. Transamerica Corp., 163 F.2d 511, 518 (3d Cir. 1947), cert. denied, 332
U.S. 847 (1948).
86. The SEC finds additional rule-making authority in the broad language of
section 23(a). See note 81 supra.
1156 COLUMBIA LAW REVIEW (Vol. 74:1139
holder proposals was justified as furthering disclosure to shareholders. Manage-

ment's failure to disclose everything that it knew would transpire at the
stockholders meeting would enable it to obtain proxies by misrepresentation.
Purcell said:
The proxy statement purports to tell the stockholders everything that
is going to be taken up at the meeting. The management knew these
proposals were going to be taken up at the meeting. It knew that it
intended to oppose them. Any statement which did not include those
proposals and the position of the management was obviously mis-
leading, because the soliciting material purported to tell the stock-
holders everything that is8 7going to be taken up at a meeting that the
management knew about.
Although he was referring to management's omission of shareholder proposals

from the corporate proxy material, the logic of his statement applies with
equal force to the omission of shareholder nominees from the corporate proxy
statement.. Management's request for proxies on behalf of its nominees for
director, while failing to mention that other nominees will be put forth by
shareholders, is similarly misleading. Moreover, the Commission's authority
under section 14(a), according to Purcell, extends beyond the disclosure
principle to encompass a broad "power to control the conditions under which
proxies may be solicited"88 and to promulgate all rules and regulations "rea-
sonably related to the solicitation of proxies and to the improvement of the
proxy machinery." 8 9
Legislative history and judicial and administrative interpretations sup-
port the SEC's power to require management to include appropriately sub-
mitted shareholder proposals in the corporation's proxy material. In terms of
the Commission's -authority, it is difficult to distinguish the shareholder's
right to have his proposals included in the corporate proxy material from his
right to have his nominees for director so designated. In fact, shareholder
nomination of directors could be considered a more fundamental shareholder
right than shareholder proposals. In any case, the importance of complete dis-
closure to ensure "fair corporate suffrage" is equally compelling in both con-
texts.
If the SEC has the authority to promulgate a proxy rule requiring designa-
tion in the corporate proxy statement of shareholder nominees, this approach
to adoption would be most attractive to the corporate reform advocate. Proxy
rules revision would provide the most comprehensive approach, reaching al-
most all major corporations in the country,9 0 compared with a corporation by
corporation, or state by state approach. Unlike the "Delaware syndrome"
87. Hearings, supra note 4, at 170.

88. Id. at 178-79.
89. Id. at 179.
90. See note 66 and accompanying text sitpra.
plaguing the state law approach, 91 corporations could not escape the applica-
tion of a proxy rule. While the stock exchange requirements approach would
provide a comprehensive, relatively escape-proof route, amendment of the
proxy rules would be preferable because of the greater likelihood of adoption
92
and the added flexibility for implementation and enforcement.
III. PROCEDURES FOR IMPLEMENTATION OF DESIGNATION OF

SHAREHOLDER NOMINEES
Regardless of the mode of adoption of the shareholder's right to designate

candidates for director in the corporate proxy statement-managerial initiative,
shareholder proposals, state litigation, legislative action, additions to stock
exchange listing requirements, or revision of the proxy rules-the development
93
of procedures and mechanisms for implementation remains a further task.
Whether this is done by a shareholder, corporate management or a state court
judge from the vantage point of designing procedures specifically gauged to
meet the needs of a particular corporation, or by the state legislature, the
exchanges, or the SEC from the perspective of more general application, certain
basic problems of implementation must be faced and resolved in accord with
the basic policies the reform is designed to serve. The problems of implemen-
tation, with which this section will deal, present a basic tension between
conflicting policy objectives. On the one hand, the proposed reform is aimed
at facilitating shareholder communication and strengthening shareholder control
over the board of directors and, ultimately, management. On the other hand,
there is the danger that this reform will encourage the harassment of manage-
ment and the waste of corporate assets, and render the corporate proxy
statement unintelligible. This section will examine the interplay of these
competing considerations in the context of the significant aspects of the
implementation process and suggest procedures which may accommodate these
conflicting concerns.
A. Access for Slwreholder Sponsors
The problem of access for shareholder sponsors is a matter of determining
the proper threshold barrier that shareholders must overcome in order to
secure access to the corporate proxy statement. The standard should be suf-
ficiently high to ensure that shareholder sponsors will represent a "significant
interest" of the corporate electorate and to discourage potential abuse of the
proxy machinery and harassment of management. Yet at the same time, the
standard must be low enough to guarantee that access to the corporate proxy
material is available, as a practical matter, to the relatively small shareholder.
91. See text following note 72 mupra.
92. See Schwartz, Public-Interest Proxy Contest, supra note 30, at 522.
93. See Schwartz, Corporate Responsibility in the Age of Aquarius, 26 Bus. LAW
513, 522 (1970).
COLUMBIA LAW REVIEW [Vol. 74:1139
"Significant interest" can be measured in terms of shareholders, 4 share-

holdings, 95 or a combination of the two.96 Numerical requirements should take
into consideration the particular corporation's total number of outstanding
shares or shareholders. Percentage requirements presumably automatically
proportion themselves to the size of the corporate electoral base. Nevertheless,
a mechanical adoption of a fixed percentage requirement ignoring the total
number of shares or shareholders would be ill-advised. While requiring a
shareholder of a a corporation with 1000 shareholders to secure ihe signatures
of 57o (or 50) of the shareholders may not be particularly burdensome, impos-
ing the same percentage requirement in the case of a million-shareholder
corporation would foreclose access to the corporate proxy statement by all but
the largest shareholders. For most large corporations a requirement in excess
of one percent would prove an insurmountable hurdle for the overwhelming
97
majority of shareholders.
The experience of "significant interest" requirements in analogous areas
of corporations law suggests that a relatively minimal showing will not lead
to shareholder abuse or a strain on corporate resources. Under Proxy Rule
14a-8 any security holder, regardless of the size of his shareholdings, is
deemed to have a sufficient "significant interest" to submit a proposal for
inclusion in the corporation's proxy statement. 98 In spite of this open access
to the proxy machinery, it is generally agreed that there has been little, if any,
abuse by shareholders, and that management has not been seriously burdened
by the Rule.99 State statutory provisions conditioning access to shareholder
94. See, e.g., 1942 proposed revision of SEC Proxy Rule X-14a-2(b), note 79 supra
(any single shareholder); suggested implementation plan for Levi Strauss & Co.,
Memorandum from Donald E. Schwartz to Walter A. Haas, Jr., Chairman of the
Board, Levi Strauss & Co., at 3 (July 5, 1973) (unpaginated), on file at Columbia
Law Review [hereinafter cited as Memorandum] (25 shareholders); 1971 shareholder
proposal for inclusion in the General Motors proxy statement, note 61 supra (100
shareholders). In the analogous arena of alumni nomination of candidates for a Uni-
versity's Board of Trustees, two-hundred living degree holders had been the standard
for nomination by certificate for Harvard College's Board of Overseers. See Nomination
and Election of Overseers of Harvard College (March 1969), on file at Cohmbia Law
Review.
95. See, e.g., 1971 shareholder proposal for inclusion in the General Motors proxy
statement, note 61 supra (1500 shares) ; 1949 shareholder proposal in the Illinois Central
Railroad Co. proxy statement, Emerson & Latcham, supra note 55, at 818-19. (5000
shares) ; Eisenberg, Access to Proxy Machinery, supra note 12, at 1508 (5% of out-
standing shares).
96. See, e.g., suggested implementation plan for Levi Strauss & Co., Memorandum,
swtpra note 94, at 3 (1000 shares held by at least 3 shareholders who are both holders of
record and beneficial owners). For examples of the-potentially infinite combinations of
shares and shareholders, see Ratner, supra note 30, at 3-15.
97. Percentage requirements will also present an administrative problem. Since the
number of shares and shareholders outstanding is always fluctuating, sometimes dras-
tically from year to. year, it would be necessary to set a date at which the base of
shares outstanding or shareholders could be determined. This date would have to be
set sufficiently in advance of the time a shareholder would be seeking to collect signa-
tures so that he could accurately estimate the number required.
98. 17 C.F.R. 240.14a-8(a) (1973).
99. See Caplin, Proxies, supra note 60, at 678-79; Emerson & Latcham, supra note 55,
at 835. See also SEC, THIRTY-EIGHTH ANNUAL REPORT OF THE SECURITIES AND EXCHANGE
CommissioN (1972).
19741 SHAREHOLDER NOMINEES 1159
lists upon a minimal tenure as a shareholder 0 or the authorization from, or

ownership of, a small percentage of the outstanding stock of any class of
shares' 0 ' provide a second area for comparison. Despite these relatively mild
restrictions, there is no evidence of shareholder abuse of the right of inspec-
tion. 10 2 Corporate bylaw restrictions on a shareholder's right to nominate
candidates for director at the annual shareholders meeting provide a third body
of experience. Although these restrictions are relatively rare because of the
marginal utility of nominations made at shareholders meetings, 10 3 the existing
case law' 04 suggests that bylaws requiring the signatures of twenty-five percent
of all shareholders would be invalidated as unreasonable, 10 5 while those requir-
ing the signatures of five percent of all shareholders might be upheld as
"reasonable and necessary" restrictions. 10 6
It is recommended that the shbwing of "significant interest" required to
secure access to the proxy material be a minimal one. A minimal requirement
would seem most appropriate in light of the fact that the corporation's interest
in not having its proxy statement bloated with shareholder nominees can be
served by procedures designed to limit the number of shareholder nominees to
be designated, 10 7 as well as by procedures designed to restrict access for
shareholder sponsors. In fact, restrictions on the number of shareholder
nominees would provide a more direct, effective insurance against bloated
corporate proxy statements. Once the maximum number of shareholder
nominees that can be designated in the corporate proxy statement is determined,
the "significant interest" requirement serves only to ensure good faith on the
part of the shareholder sponsor. No legitimate corporate interest is served by
restricting the right to nominate beyond this point.
B. The Number of ShareholderNominees

Establishing an upper limit on the number of shareholder nominees to be
included in the corporate proxy statement is essential.10 Neither the corpora-
tion's nor the stockholders' interests are served -by permitting the corporate
100. See, e.g., N.J. STAT. ANN. 14A:5-28(3) (1969) (six months); N.Y. Bus.
CORP. LAW 624(b) (McKinney 1963) (six months); AMERICAN BAR FOUNDATION,
MODEL BUS. CORP. AcT ANN. 52 (2d ed. 1971) (six months).
101. See, e.g., N.J. STAT. ANN. 14A-5-28(3) (1969) (517 of the outstanding
shares of any class); N.Y. Bus. CoRP. LAW 624(b) (McKinney 1963) (5%7 of the
outstanding shares of any class) ; AMERICAN BAR FOUNDATION, MODEL Bus. CORP. ACT
ANN. 52 (2d ed. 1971) (5%o of all the outstanding shares).
102. Cf. Note, 25 VAND. L. REv. 425 (1972) ; Note, 46 TUL. L. Rsv. 1002 (1972).
103. See notes 4-5, 14 and accompanying text supra.
104. Most of the case law concerning these bylaw restrictions is either dated or
involves only small corporations. See Eisenberg, Access to Proxy Machinery, supra
note 12, at 1508 n.78; Caplin, Shareholder Nominationr of Directors, stpra note 43, at
160 n.46.
105. See Commonwealth ex rel. Gallagher v. Knorr, 21 Pa. Dist. 784, 786 (1912).
106. See Stuberfield v. Long Island City Say. & Loan Ass'n, 37 Misc. 2d 811, 819,
235 N.Y.S.2d 908, 918 (Sup. Ct. 1962).
107. See notes 108-119 and accompanying text infra.
108. See Hearings, supra note 4, at 157 (memorandum submitted by Lewis H.
Brown) ; IRRC, SHAREHOLDER NoMINATIoN, supra note 4, at 4-5.
proxy statement to be transformed into an unwieldy volume of candidates'

names. The designation of an excessive number of candidates in the corporate
proxy statement will only increase the corporation's cost of printing and
distributing the proxy material while impeding the stockholder's task of
intelligently exercising his corporate franchise.
Suggesting numerical standards for limiting the number of designated
nominees requires hazardous calculations on little foundation. At least one
numerical maximum, however, carries policy significance. If the maximum
number of designated shareholder nominees is set at less than half of the
number of directors to be elected at the shareholders meeting, management
cannot be ousted from control by the election of the shareholder nominees.
Absent a challenge by an independently financed proxy contest for control,
setting the limit on the number of designated shareholder nominees at less
than half of the number of directors would guarantee the election of at least a
majority of management's nominees. 10 9 This limitation would also exclude the
designation of shareholder nominees device from the arsenal of the corporate
raider in accordance with the underlying objective of enlarging the opportunity
for shareholder input rather than subsidizing naked contests for control. 110
Furthermore, this limitation serves the corporate purpose of providing a degree
of continuity on the board'1 1 and is most likely to elicit the endorsement of
those managers who are willing to consider a modest degree of experimen-
tation.1 2 On the other hand, setting the maximum this low may defeat one
of the primary purposes of the proposed reform-the encouragement of
management accountability by rendering insecure their position of control.118
While the limitation of designated shareholder nominees to less than half
of the number of directors to be elected may be unwise, some limitation is
necessary to preserve the integrity of the corporate proxy statement as a
vehicle for intelligently informing the corporate electorate and to prevent
the excessive depletion of the corporate coffers in the name of shareholder
democracy. The determination of this limitation should be a function of two
factors: the size of the corporation's board of directors and the marginal cost
to the corporation of printing and distributing the name and information of
each additional shareholder nominee in the corporation's proxy statement.
It is recommended that the maximum number of shareholder nominees des-
109. See notes 1-5 and accompanying text supra.

110. For further discussion of the problems raised by proxy contests for control,
see generally W. CARY, CORPORATIONS, supra note 68, at 316-19; E. ARANOW & H.
EINHORN, PROXY CONTESTS FOR CORPORATE CONTROL (2d ed. 1968) [hereinafter cited as
ARAwow & EINHORN]; Armstrong, Regulation of Proxy Contests by the S.E.C., 42
VA. L. REv. 1075 (1956); Bayne & Emerson, The Virginia Chemical Corporation Proxy
Contest: A Case-Study of the S.E.C.'s New Rude 24014a-11 and Schedule 14B, 57
COLUm. L. REv. 801 (1957).
111. See Caplin, Proxies, supra note 60, at 685.
112. Id. See also Memorandum, supra note 94, at 2-3.
113. See notes 1-5, and accompanying text supra.
ignated in the corporate proxy statement be fixed at from one to two times the
number of directors to be elected.'1 4 Such a limitation would strike a reasonable
balance: not too costly or burdensome to management, yet sufficient to
encourage accountability; not so numerous as to confuse and overwhelm
shareholders, yet sufficient to provide a considerable diversity of choice. To
deal with the problem of corporate raiding without vitiating the effectiveness
of the proposed reform as a means of increasing management accountability,
the number of nominees that may be sponsored on a single petition should be
limited to three, and each shareholder should be permitted to sign only one
petition." 5
Having fixed the maximum number of shareholder nominees that the
corporation must include in its proxy statement, some equitable procedure
must be devised to select which shareholder nominees will be furnished space
in the corporate proxy material in the event that more than the maximum
number are nominated by sponsors satisfying the "significant interest"
requirement." 6
Any of a number of reasonable methods will serve this purpose, so long
as they are clearly postulated and announced in advance. Timeliness of petition,
consensual withdrawal of nominees and designation by lot have been sug-
gested.117 Another possible selection procedure would draw from the "3-6-10"
requirement of Proxy Rule 14a-8"18 to prevent unsuccessful candidates from
annually appearing on the corporation proxy statement for no other purpose
than to harass management." 9 Perhaps the most effective device consistent
with the policy of maximizing shareholder participation and representation 20
would be to give a preference for designation in the corporate proxy material
1 21
to those shareholder nominees with the most petition signatures.
114. In Campaign GM's 1971 shareholder proposal, the limitation on the number of
shareholder nominees was set at thirty for a board of twenty-three directors. For text of
proposal, see note 61 supra. The 1942 proposed revision of the SEC's Proxy Rules
would have required the corporate proxy statement to include no more than twice as
many shareholder nominees as directors. For text of proposed amendment, see note 79
supra. Accord, Caplin, Shareholder Nomination of Directors, supra note 43, at 153.
115. While this restriction will deny corporate raiders access to the corporate proxy
statement, it will similarly undermine the prospect of shareholder coalitions to encourage
management accountability by threatening ouster of a majority of the board. Since the
probability of electing even a few shareholder nominees is slight, see text preceding note
42 sipra and note 98 supra, this is a relatively insignificant drawback.
117. See note 61 supra.
118. A nominee would be barred from seeking designation if he had been designated
in recent elections and failed to achieve a minimum percentage of support. See 17 C.F.R.
240.14a-8(c) (4) (1973) ; see note 51 supra.
119. See Brey, A Synopsis of the Proxy Rules of the Securities and Exchange Coin-
mission, 26 U. CiN. L. R:v. 58, 81 (1957).
120. See Memorandum, supra note 144, at 4.
121. Giving preference to shareholder nominees with the most signature support may
favor wealthy candidates. Should this danger materialize in the course of applying these
procedures, refinement may prove necessary.
C. ShareholderPetitioningfor Designationas Solicitation

If shareholders are compelled to petition for the support of other share-
holders in order to satisfy the "significant interest" barrier to access to the
proxy machinery, this petitioning process may be construed as a "solicitation"
within the meaning of the SEC Proxy Rules. Such a construction would
require the shareholder sponsor to undertake considerable administrative
22
burdens and expose himself to liability for false and misleading statements.1
For those sponsors with limited resources, these Proxy Rule requirements
might foreclose utilization of the proposed reform.
The Proxy Rules define "solicitation" to include any
communication to security holders under circumstances reasonably
calculated to23 result in the procurement, withholding or revocation
of a proxy.'
Since the request to sign a petition supporting the designation of a particular
nominee in the corporate proxy material is a communication made with a view
towards the eventual procurement of proxies, the requirements of the Proxy
Rules may well apply. Second Circuit decisions have taken a broad view of
"solicitation," encompassing any communication that is part of a "continuous
plan" aimed at the actual solicitation of proxies.124 Other courts have sought
to limit the parameters of "solicitation" by imposing an element of intent to
influence proxy voting.'2 5 A third approach would be to define the scope of
"solicitation" as the resultant of the tension between the policy of protecting
shareholders from fraudulent solicitation and the countervailing objective of
minimizing administrative obstacles to inter-shareholder communication. Under
any of these definitions, sponsor petitions aimed at the designation of nominees
in the corporate proxy statement and the authorization of proxies in favor of
those nominees should be included. The petitions are clearly part of a "continu-
122. If petitioning for shareholder nominee designation is regarded as "solicitation,"
the sponsor would have to include a proxy statement with each request for petition
support pursuant to Proxy Rule 14a-3, 17 C.F.R. 240.14a-3 (a) (1973), comply with the
filing requirements of Proxy Rule 14a-6, id. 240.14a-6, and adhere to the strictures against
false and misleading statements under Proxy Rule 14a-9, id. 240.14a-9.
123. 17 C.F.R. 240.14a-1(f) (1) (iii) (1973).
124. See SEC v. Okin, 132 F.2d 784, 786 (2d Cir. 1943) ; accord, Studebaker Corp. v.
Gittlin, 360 F2d 692, 696 (2d Cir. 1966).
125. See Brown v. Chicago, Rock Island & Pacific R.R., 328 F.2d 122 (7th Cir. 1964).
Further support for the Seventh Circuit's view that "solicitation" does not reach all
communications to shareholders can be found in the SEC's proposed amendment in 1955
to broaden the definition of "solicitation" to reach any activity likely to influence proxies.
The proposed amendment would have included
any statement made or used by or on behalf of any participant in a solicitation
(i) in support of or in opposition to any matter to be acted upon by security
holders of an issuer, including an election of directors, whether addressed directly
to secuiity holders, or to a group of persons or the general public or (ii) which
may facilitate, influence, aid or obstruct the giving or revoking of proxies by
security holders.
Securities Exchange Act of 1934 Release No. 5212 (August 23, 1955).
ous plan" aimed at the actual- solicitation of proxies, and the sponsors clearly
intend to influence the voting of proxies by the signators of their petitions.
While the inclusion of shareholder petitioning within "solicitation" may
further the protective purposes of the Proxy Rules, it may also raise insur-
mountable barriers for shareholder-sponsors with limited financial resources.
26
The burdens of complying with the antifraud provision of rule 14a-91 and
27
the filing requirements of rule 14a-61 are not so onerous as to outweigh the
advantages in terms of accurate communication and disclosure that would
accrue to the corporation and its shareholders. On the other hand, strict
compliance with rule 14a-3,128 which requires the furnishing of a proxy state-
ment to each stockholder at the time his petition support is requested, could
create a heavy financial burden for the shareholder-sponsor. To the extent that
the measure of "significant interest" is set relatively high,' 29 the petitioning
sponsor can anticipate having to distribute more proxy statements to more
stockholders, and the cost of complying with rule 14a-3 will rise. To avoid
converting compliance with rule 14a-3 into a bar to the nomination petition
activity of the small shareholder, minimal numerical requirements for access
130
to the corporate proxy statement should be adopted.
D. Discretionary Proxies
Even where the numerical requirements for shareholder sponsor access,
the limits on the number of designated shareholder nominees and the pro-
cedural hurdles of the SEC Proxy Rules have been successfully surmounted,
collateral procedures may bolster management's position to the point of
vitiating the practical effect of the proposed reform. One such procedure
that bears directly on the prospects for success of shareholder nominees is
management's use of discretionary proxies. Discretionary proxies enable
management to vote, at its discretion, any shares covered by proxies signed by
owners of record who have not specifically indicated any preference for certain
corporate offices and issues.' 3 ' The discretionary proxy system gives manage-
129. If the shareholder-sponsor is able to secure a sufficient number of signatures
without soliciting more than ten shareholders, the Proxy Rule requirements for "solicita-
tion" would not apply. See 17 C.F.R. 240.14a-2(a) (1973).
130. See notes 94-107 and accompanying text supra. If the proposed reform is adopted
through a revision of the SEC Proxy Rules, see notes 78-92 and accompanying text stpra,
the new rules should exempt shareholder petitioning from rule 14a-3, but not from rules
14a-6 and 14a-9. See note 122 supra. Since the shareholder will receive the corporation's
proxy statement, which is itself subject to SEC scrutiny, before he authorizes his proxy,
there is little purpose served by duplicating this effort at the time of the petitioning for
shareholder nominees. Any shareholder who signs a nominee's petition for designation is,
of course, not committed to vote for that candidate.
131. See generally INVESTOR RESPONSIBILITY REsEARcH CENTER, INC., DiScRETIONARY
PROXIES (Special Report No. 4 April 11, 1973) [hereinafter cited as IRRC, DiscRE-
TIONARY PROXIES].
ment the right to vote as it sees fit the proxies of arguably distinterested
shareholders. Most sponsors of proposals for the designation of shareholder
nominees in the corporate proxy statement have incorporated the elimination
of the discretionary proxy within their proposal.' 3 2 They argue that as long
as management remains free to vote discretionary proxies in favor of its slate
of candidates for director, the appearance of shareholder nominees in the
corporate proxy statement is not likely to alter the election results.138
It is difficult to estimate the advantage that discretionary proxies provide
for management. To the extent that discretionary proxies represent the shares
of supporters of management who simply find the discretionary proxy the most
convenient method to express that support, it is no real advantage to
management. 34 But to the extent that discretionary proxies represent the
shares of apathetic shareholders, the availability of discretionary proxies is a
definite advantage to management. Moreover, by encouraging unthinking,
across-the-board endorsement of management candidates on the part of
apathetic shareholders, the discretionary proxy system undercuts one of the
major purposes of the proposed reform-the facilitation of the communication
of ideas and information among shareholders, hopefully leading to a more
informed vote.
Corporate managers argue that the discretionary proxy does not distort
the shareholders' true view-since shareholders choose to give management
their discretionary proxy-and that eliminating the discretionary proxy
would only confuse the shareholders by compelling them to separately mark
their position on each proposal and candidate. They also maintain that the
elimination of the discretionary proxy would violate the corporations law of
most states. Many states confer a broad right on stockholders to vote by proxy,
which may be exercised in a discretionary or restricted form. Prohibiting the
use of discretionary proxies would arguably operate to impinge on the share-
holder's broad right to vote by proxy.135 The force of this legal argument has
yet to be tested in the context of shareholder nominations. Even if the courts
were to adopt such a position, proposals could be designed that would
substantially reduce the utility of discretionary proxies for management-by
requiring specific authorization of management's discretionary use-without
limiting the shareholder's statutory right to confer a discretionary proxy.13 6
132. See the Project on Corporate Responsibility shareholder proposal to General
Motors in 1971, note 61 supra; accord, the 1942 SEC proposed Proxy Rule X-14A-2(a),
Hearings,supra note 4, at 36.
133. IRRC, SHAREHOLDER NOmINATION, supra note 4, at 5, 7.
134. Management, on occasion, has taken no position in a shareholder vote, and
therefore finds no need to exercise its discretionary proxies. See, e.g., IRRC SHAREHOLDER
PRoxiEs, supra note 131, at 3-4. Management, of course, may feel more compelled to use
its discretionary proxies when it strongly opposes a shareholder proposal or nominee for
director.
135. See Letter from S. Samuel Arsht of Morris, Nichols, Arsht & Tunnel to Ford
Motor Company, January 9, 1973, on file at Columbia Law Review.
136. One such procedure would be to require the stockholder to sign his proxy and
1974) SHAREHOLDER NOMINEES 1165
Wherever state law permits, the discretionary proxy system should be

eliminated.137 Proxy authorization procedures should be simple and convenient,
but not at the expense of denying shareholder candidates an equal opportunity
to win votes relative to management's candidates and encouraging unreflective
shareholder voting.
E. Proxy Format
The actual format of the proxy and the presentation of the shareholder
nominees in the proxy statement will determine, in large part, the ability of
shareholder nominees to influence other shareholders, and through them,
management. A mere listing of the nominees' names is not sufficient if the
corporate electorate is to exercise an intelligent choice. A two-hundred-word
position statement by the nominee, as is permitted by the SEC for shareholder
proposals, 3 8 would serve as a satisfactory compromise between management's
interest in keeping the cost of designation of shareholder nominees to a
minimum and the stockholders' interest in being sufficiently well-informed to
vote intelligently. Inclusion of an impartial biographical sketch is similarly
justified. 3 Publishing the name of the nominee's sponsor is equally germane
to the stockholders' choice. The stockholders have a right to know which
interests the nominee represents. Where the sponsorship of the nominee is not
readily determinable-for example, the nominee may lack a declared affiliation
or be sponsored by an ad hoc group of shareholders-the three signators of
his petition with the largest holdings could be listed as sponsors.
Although management is entitled to inform shareholders of the identity
of its nominees, the proxy itself should not allow for slate voting. 40 As with
discretionary proxies, slate voting should be discouraged because of its tendency
to facilitate undiscerning, uninformed shareholder voting. 141 A vote for each
nominee should be made individually. Ideally, a nominee's position on the
proxy would be determined randomly in order to ensure intelligent voting
and the equal opportunity to succeed.
mark a single box explicitly authorizing management to vote his shares at its discretion.
The stockholder's signature alone would be insufficient to bestow a discretionary proxy.
See IRRC, DISCRETIONARY PRoxiEs, supra note 131, at 2.
137. Elimination of the discretionary proxy would entail the development of several
related procedures, such as provisions allowing for the substitution of candidates in the
event of a vacancy in the proxy statement due to a designated candidate's death or with-
drawal prior to the election.
138. 17 C.F.R. 240.14a-8(b) (1973). See also Brochure on 1973 Candidates for
Harvard College Board of Overseers, on file at Columbia Law Review [hereinafter cited
as Harvard Candidates Brochure].
139. See, e.g., Harvard Candidates Brochure, supra note 138; Official Ballot, Alumni
Trustee Election, University of Pennsylvania, on file at Columbia Law Review.
140. Slate voting permits the voter to cast his support for the entire slate by marking
a single box. Individual voting, on the other hand, compels the voter to mark his support
for each candidate separately.
141. See notes 131-134 and accompanying text mupra.
1166 COLUMBIA LAW REVIEW .[Vol. 74:1139
F. Costs
Another consideration related to the efficacy of designation of shareholder
nominees is cost.1 42 The only direct costs to the corporation of implementing
the proposed reform involve (1) the added manpower necessary to administer
the prozedures, and (2) the increased expense of printing, distributing and
tabulating a presumably larger proxy statement. It should be noted that this
proposal does not require the corporation to distribute a proxy statement that
it would not otherwise have had to distribute to the shareholders. The share-
holders' right to designate candidates for director in the corporate proxy
statement accrues only when management decides to distribute a proxy
43
statement to the shareholders.
The cost of administration should prove marginal, requiring little, if any,
addition to the corporation's administrative work force. To the extent that
proxy prozedures are geared to a specific firm's organization patterns and
44
administrative routine, these costs are predictable and can be controlled.1
The added cost of printing, distributing and processing a larger proxy state-
ment is similarly controllable. As already discussed, cost considerations must
play a part in determining the limitation of the number of shareholder nominees
to be designated in the corporate proxy statement. 1 45 Data processing costs
would not be significantly affected by an increase in the number of nominees
carried on the proxy card, so long as the complete list of names could be
presented on a single card.' 46 Estimates on the actual costs involved are
hazardous. The projection of costs may be as much a product of the projector's
position on designation of shareholder nominees as the result of dispassionate
cost analysis. One reasonably impartial source has estimated that "[filf a
doubling in the number of candidates occurred, the additional costs [of proxy
preparation, printing, mailing and processing] probably would not exceed ten
147
cents per shareholder."
These costs, that the corporation and through it the stockholders in general
142. The question of whether the cost of implementing these procedures is justified
by the resulting benefit to the corporation represents only a small element within the
framework of the larger question of proxy contest expenses. Should the corporate treasury
be available to finance management's proxy contest expenses? Should insurgents, whether
they win or lose, be entitled to reimbursement from the corporation for their reasonably
incurred proxy contest campaign expenses? Does encouraging proxy contests by under-
writing the expense benefit the corporation's stockholders by providing them with real
choices? Or, does corporate reimbursement merely drain the corporate treasury, unjustified
by any corporate purpose? These questions need not be confronted in their entirety here.
See generally ARAOW & EINHORN, supra note 110, at 541-82; Latcham & Emerson, Proxy
Contest Expenses and Shareholder Democracy, 4 W. Rs. L. REv. 5 (1952).
143. See Eisenberg, Access to Proxy Machinery, supra note 12, at 1509-10.
144. If provision is not made for possible shareholder abuse in the form of numerous
stalking-horse candidates and lengthy descriptions of candidate biographies and platforms,
the administrative costs may become prohibitive.
146. Cf. Letter from Robert Shenton, Secretary to the President and Fellows of
Harvard College to the author, February 14, 1974, at 1, on file at Columbia Law Review.
147. IRRC, SHAREHOLDER NOmInATION, supra note 4, at 6.
would have to bear, should be compared with the costs of alternative methods
for allowing shareholders to choose between competing policies and .personnel.
Proxy contests, for example, can be very expensive both for management and
x48
insurgents.
The designation of shareholder nominees in the corporate proxy statement
is no panacea for the individual advantages that result from an inequitable
distribution of wealth. Shareholder nomination of directors at corporate ex-
pense will not completely neutralize the impact of personal campaign funds.
Although designation of shareholder nominees in the corporate proxy statement
is a step in an egalitarian direction, such a device will negate neither the
advantages nor the necessity of affluence in vying for a position on the
corporate board.
G. Timing
The prime considerations in setting the time for the shareholder petitioning
activities are the convenience of the corporation in preparing the proxy
statement and the sponsor in collecting signatures. The corporation must have
sufficient time to examine and validate all shareholder nominee petitions. If
more shareholder nominations are presented than the stipulated maximum
number of designated shareholder nominees, the corporation must be allotted
sufficient time to select those nominees who will be designated. 149 Further, the
corporation must have sufficient time to verify that the shareholder nominee is
qualified to serve as a director in compliance with corporate bylaws and state
law,' 0 and to scrutinize nominee statements for possible misrepresentation
violative of the Proxy Rules. On the other hand, the shareholder sponsor would
prefer as much time as possible close to the time of the stockholders meeting
to collect signatures.
Existing procedures are indicative of the appropriate timetable for the
preparation of the proxy statement. Proxy Rule 14a-8 requires the filing of all
shareholder proposals seventy days in advance of the date of release of the
prior year's proxy statement. 15' Corporations generally distribute their proxy
statements a little over a month before the stockholders meeting. 5 2 Therefore,
148. For estimates of the cost of recent proxy contests, see, e.g., Pomerantz, Book
Review, 117 U. PA. L. REv. 493 (1969) ($40,000 to $1,000,000) ; Levin v. Metro-Goldwyn-
Mayer, Inc., 264 F. Supp. 797, 802 (S.D.N.Y. 1967) ($175,000); Hearings on SEC
Enforcement ProblemsBefore a Subcomm. of the Senate Comm. on Banking and Currency,
85th Cong., 1st Sess. 115 (1957) ($19,000 to $83,019); ARANOW & EINHORN, supra note
110, at 543 ($6000 to $1,308,733) ; Caplin, Proxies, supra note 60, at 668 n.30 ($27,755) ;
IRRC, SHAREHOLDER NomiNATi N, supra note 4, at 5 ($125,000 for company of 500,000
shareholders).
150. The possibility of nominations of individuals not qualified to serve as directors
under state law was raised as an objection to the 1942 SEC proposed Proxy Rules
revision. See Hearings,supra note 4, at 157. .
151. 17 C.F.R. 240.14a-8(a) (1973). See note 48 supra.
152. See, e.g., GM, PROXY STATEMENT 1971, supra note 61, at 1 (released April 5,
stockholders meeting May 21); XEROX, PROXY STATiMZNT 1973, supra note 62, at 1
advance submission dates of one hundred days before the scheduled stock-
holders meeting should not create any undue hardships. Of course, there are
no hard and fast timetables and other suggested dates are probably equally
workable. 153 The key here, as with other procedures for implementation, is
flexibility.
IV. A STEP TOWARD CORPORATE SOcIAL RESPONSIBILITY
A. Shareholders as Advocates of Corporate Social Responsibility

As a by-product of enhancing management accountability, provision for
the designation of shareholder nominees in the corporate proxy materials may
serve to encourage the corporation to recognize its social responsibilities. Cor-
porate recognition of the social costs of doing business may result from
management's greater accountability to shareholders. Shareholders, represent-
ing a broad segment of the general public, may more readily push management
to the "view of the business corporation as an economic institution which has
a social service as well as a profit-making function."' 5 4 Moreover, active socially
concerned minorities within the corporations may compel management to
consider social costs in developing corporate policy.
The corporation's social responsibilities may be viewed as a necessary
product of the corporation's existence as a social institution. 55 It would be
difficult to characterize the American corporation's influence on the public as
anything less than pervasive. Corporations influence the pattern and quality of
our lives as consumers, employees, neighbors and fellow citizens as well as
stockholders.' 56 If it is true that corporate conduct and policies do affect people
other than stockholders, 57 there is some persuasive force to holding corporate
"bulls" accountable for their impact in our social "tea shop."'' 8 Corporations,
(released April 19, stockholders meeting May 24); LEvi STRAUSS, PROXY STATEMENT
1973, supra note 62 (released March 5, stockholders meeting April 5); IBM, PROXY
STATEMENT 1973, supra note 62, at 1 (released March 16, stockholders meeting April 30).
153. See, e.g., Memorandum, supra note 94, at 3 (no later than 90 days before the
stockholders meeting); 1942 proposed SEC Proxy Rules revision, supra note 121 (no
later than 30 days before the scheduled date for the distribution of the proxy materials).
154. Dodd, For Whom are Corporate Managers Trustees?, 45 HARv. L. REv. 1145,
1148 (1932).
155. See also CARY, ComoRATioNs, supra note 68, at 240; Blumberg et al., Corporate
Social Responsibility Panel: The Constituencies of the Corporation and the Role of the
Institutional Investor, 28 Bus. LAw. 177 (1973); Rockefeller, Corporate Capacity for
Public Responsibility, 28 Bus. LAw. 53, 54-55 (1973) ; Schwartz, New Corporate Goals,
supra note 36, at 62 n.25; Blumberg, The Politicalizationof the Corporation,51 B.U.L.
REv. 425, 426 (1971) ; BERLE & MEANS, supra note 8, at 1.
156. See IRRC, SHAREHOLDER NOMINATION, supra note 4, at 3; Schwartz, New
Corporate
Nader).
Goals, supra note 36, at 59; 116 CONG. REc. 4699 (1970) (statement by Ralph
157. It has been suggested with some force that "[o]f all those standing in relation to
the large corporation, the shareholder is least subject to its power." Chayes, The Modern
Corporation and the Rule of Law, in THE CORPORATION IN MODERN SOciETY 25, 40 (E.
Mason ed. 1967).
158. Ratner, infra note 164, at 41. See 116 CONG. REc. 16397 (1970) (remarks of
with vast power and resources at their command, are in a position at least to
attempt to deal with such social problems as hard-core unemployment, racial
discrimination and pollution. From this ability to act flows the corporate
responsibility to act. 159
There are several reasons for believing that greater management ac-
countability to shareholders will encourage greater corporate social responsi-
bility. Corporate responsibility to the shareholders for profit maximization
is not necessarily antagonistic to the demand for corporate responsibility.
Outlays for modern equipment will often reduce short-term corporate profits,
but such expenditures are recognized as worthwhile investments in the cor-
poration's future. Similarly a corporation's right to make charitable contribu-
tions may be viewed as consistent with the narrow view of corporate powers
limited to profit maximization. Corporate charitable contributions and
community programs nurture a corporation's good will at the same time that
they benefit the community. Profit maximization, if viewed with a long-term
perspective by shareholders, provides sufficient flexibility with which manage-
ment can justify corporate conduct in fulfillment of its social responsibility. 60
Shareholders, because they tend to identify themselves more as members
of the general public than as part owners of the corporation, may be willing to
prod management to compromise the goal of profit maximization, if only
slightly, in an effort to ameliorate the adverse impact of corporate conduct upon
them as citizens, consumers and pedestrians. Moreover, the experience under
the Proxy Rule authorizing shareholder proposals suggests that there are
groups of socially conscious shareholders active within the corporation who
would provide the vanguard in the reeducation of management and shareholders
generally to the social costs of corporate action. Shareholder groups have used
shareholder proposals as a lobbying vehicle for a wide range of social programs.
They have sought to persuade Dow Chemical Corporation to halt its napalm
production, General Motors Corporation to cease its pollution of the atmo-
sphere, and a host of other corporations to terminate dealings with South
Africa. 161
Representative Brown, Jr.); Schwartz, Public-Interest Proxy Contest, supra note 30,
at 479.
159. Schwartz, Public-Interest Proxy Contest, supra note 30, at 464-65.
160. There is a real danger that defining corporate responsibility in terms less precise
than profit maximization would leave corporate managers unchecked to proceed at will
to adopt any policy, however disastrous to shareholder economic interests, they saw fit in
the name of social responsibility. Some commentators have suggested that defining cor-
porate responsibility in terms of "the long term economic interest of the stockholders"
would go far towards accommodating a pattern of corporate social responsibility, while
providing a workable standard against which to judge and limit managerial conduct.
See Rostow, To Whom and For What Ends Is Corporate Management Responsible?,
in THE CORPORATION IN MODERN SOCIETY 46, 71 (E. Mason ed. 1967); cf. Blumberg,
Corporate Responsibility and the Social Crisis, 50 B.U.L. REv. 157, 206 (1970).
161. See, e.g., L. GILBERT, THiRTY-THIR ANNUAL REPORT OF STOCKHOLDER AcTIvI-
TIES AT CORPORATION MEETINGS 201-02 (1972); L. GILBERT, THIRTY-FRST ANNUAL
REPORT OF STOCKHOLDER AcTIvITIEs AT CORPORATION MEETINGS 191-93 (1970).
Profit maximization is fully consistent with corporate social responsibilities

once the cost of contributing to a healthy social environment is recognized as
a necessary long-term cost of doing business. The designation of shareholder
nominees in the corporate proxy statement is a device by which the corporate
decision-making process may adapt itself to take into account calculations of
the social as well as fiscal costs of doing business.'0 2 What is required, in the
words of Dan W. Lufkin, is a "redefinition, not an abolition, of the concept of
profit-one that will assess corporate gains and losses not only in terms of
dollars but also in terms of social benefits realized or not realized. 10 3 Designa-
tion of shareholder nominees can contribute to this redefinition.
B. A Means for Expanding the Corporate Constituency

While the designation of shareholder nominees in the corporate proxy
statement may well encourage corporations to consider the social costs of
doing business, the inclusion of other corporate-affected constituencies-
employees, consumers, suppliers and the general public-into the corporate
electorate and the designation of their nominees will more surely expand the
range of social considerations before management. Corporate decision-makers
should be responsive to the needs of those from whom they earn their profit as
well as to the needs of those for whom they earn their profits. The designation of
shareholder nominees is not only a device for returning to the corporate model
of management accountability to shareholders, but may also be a first step
toward a restructuring of the corporate model to accommodate the needs of all
corporate-affected constituencies.
Advocates of the position that all corporate-affected constituencies should
have access to the board of directors operate on the premise that the appropri-
ate electorate to select the board should include all those affected by corporate
decisions. 64 Professor Chayes has broadly defined the corporate electorate to
"include all those having a relation of sufficient intimacy with the corporation
or subject to its powers in a sufficiently specialized way."'' 6r Presumably,
corporate-affected constituencies would include such groups as employees,
consumers and suppliers as well as stockholders. Whether the general public
should be represented in the corporate electorate is an open question. Though
not in direct privity to any corporate transaction, the confirmed pedestrian's
interest in automotive safety and anti-pollution devices is obvious and by no
means trivial. Without challenging these constituencies' right to have their
162. For a further discussion of the cost of external diseconomies imposed by the
corporation, but borne by society, see Coase, The Problem of Social Cost, 3 J. LAW &
EcON. 1 (1960); Holton, Business and Government, 98 DAEDALUS 41, 52-53 (1969);
Rose, The Economics of Environmental Quality, FORTUNE, Feb. 1970, at 120.
163. Schwartz, Public-Interest Proxy Contest, supra note 30, at 465.
164. Ratner, supra note 30, at 32; R. DAHL, ATER THE REVOLUTION? 121-23 (1970).
165. Chayes, Modern Corporation and the Rule of Law, in THE CORPORATION IN
MODERN SociET, 25, 41 (E. Mason ed. 1967).
interests represented, this section will consider the difficulties involved in their
incorporation within the corporate electorate. 66
Employees would be one of the easier groups to identify and bestow the
corporate franchise upon in an orderly manner. In fact, German corporate law
presently provides for labor representation on supervisory boards roughly
analogous to our own boards of directors. 1 67 Various commentators, however,
have expressed serious doubts as to the applicability of this German model to
68
American corporate law.'
Labor's interest would seem to be most in harmony with the corporation's
long-term best interests, at least as regards the firm's survival. Labor's short-
run interests, however, are not likely to always be compatible with the
corporation's best interests, such as regards wage schedules and shifts from
labor-intensive to capital-intensive production techniques.
Consumers are another potential constituency for the corporate electorate.
The problem of defining this group, however, might render this/ proposal
unworkable. Providing consumers access to the corporate franchise might
prove to be the equivalent of bestowing the vote upon anyone who asked for
it.269 Extension of the franchise to consumers may entail the inclusion of
wholesale consumers as well as retail consumers-two groups'with frequently
divergent interests. Would Greyhound, as one of GM's largest consumers, be
entitled to vote for the board of directors of General Motors? Professor Ruml
forcefully argues that representation of such interests on the corporate board
would result in "business political gangsterism."' 70 Another difficulty would
be devising a fair, viable formula to allocate votes among consumers, for
allocation by dollar volume would give an inordinate advantage to wholesale
consumers to the detriment of the far more numerous retail consumers. The
problems with bestowing the vote to suppliers would seem no less insurmount-
able, for they would presumably exercise their corporate franchise to maximize
the corporation's demand for their products regardless of the corporation's
166. Ratner, supra note 30, at 32.

167. See generally Steefel & Von Falkenhausen, The New German Stock Corporation
Law, 52 CORNELL L. REv. 518, 526-39 (1967) ; Vagts, Reforming the "Modern" Corpora-
ion: Perspectivesfrom the German, 80 HAsv. L. REv. 23, 50-53, 64-78 (1966) ; W. BLU-
MENTHAL, CODETERMINATION IN THE GERMAN STEEL INDUSTRY (1956); H. SPIRO, THE
PoLrIcs OF GERMAN CODETERMINATION (1958).
168. Vagts, Reforming the "Modern" Corporation: Perspectives from the German,
supra note 167, at 76-78; W. BLUMENTHAL, CODETERMINATION IN THE GERMAN STEEL
INDUSTRY 114 (1956).
169. Ratner, supra note 30, at 32-33.
170. It would result in business political gangsterism that would destroy the
efficiency of business management. It would inject, into circles requiring the most
intimate confidence, individuals whose reliability was uncertain and whose motives
and ambitions would be in doubt. A board elected in such a manner would be
injurious to the true welfare of ... [those] who have An interest in the success
of the business.
Ruml, Corporate Management as a Locus of Power, 29 CHL-KENT L. REv. 228, 242-43
(1951).
profit prospects or social responsibilities. Enfranchisement of the general

public may involve similar problems of impracticality and conflict of interests.
But problems more fundamental than concern for the plan's technical
feasibility are raised by the extension of the corporate franchise to any of these
corporate-affected constituencies. A policy determination that the power of
these groups should be enhanced vis-a-vis the corporations affecting their
interests, and that this enhancement should take the form of access to corporate
electoral processes, must first be made. Consumers, employees and suppliers
may well suffer fron an inability to protect their interests in dealing with
corporate management. These disparities may be rectifiable through increasing
the corporate-affected constituencies' power of negotiation, 171 conferring new
substantive rights and creating adequate remedies, 17 2 or permitting direct
nominating and voting participation by these interest groups in corporate
affairs. It is by no means clear that this third alternative is the most viable
means of redesigning the power relationships of these parties. Unless and until
it is evident that management accountability for the social consequences of
corporate conduct is impossible without radical changes in the corporate
electorate, the practical difficulties of bestowing the corporate franchise on these
interest groups as well as the American disposition towards the resolution of
interest group conflicts through adversarial processes-negotiation, changes in
market behavior and litigation-are compelling reasons for denying corporate-
affected constituencies access to the corporate franchise. 173
CONCLUSION
The designation of shareholder nominees in the corporate proxy statement

provides a workable alternative to the expensive independent proxy contest
and the futile nomination from the floor at the shareholders meeting. Manage-
ment's exclusive control of the corporate proxy statement-one incident of a
more general separation of corporate control from corporate ownership-has
facilitated management's insulation from any real accountability to shareholders.
While the external restraints of government regulation and the market
mechanism have provided some check on management behavior, management
remains basically unaccountable to shareholders. By facilitating shareholder
communication to management, and, by occasionally threatening management
with ouster, this proposal for the designation of shareholder nominees should
restore a degree of management accountability to the corporate model.
Revision of the SEC Proxy Rules offers the optimal approach toward
adoption. This avenue enjoys the advantages of comprehensiveness, flexibility
171. See, e.g., National Labor Relations Act, 29 U.S.C. 151-68 (1970); UCC
2-302 (1970).
172. See, e.g., Clayton Act, 15 U.S.C. 12-27 (1970), Automobile Dealers' Day in
Court Act, 15 U.S.C. 1221-25 (1970).
173. Eisenberg, Modern Corporate Decisioninaking, supra note 35, at 21.
and practicability. Adoption through the shareholder proposal approach, while

valuable for the publicity it may generate, is too piecemeal an approach for the
serious corporate reformer. Changes in the state law and the requirements of
the New York Stock Exchange offer little chance of adoption, although the
latter is certainly comprehensive enough to affect corporate managements.
Formal adoption of the principle of designation of shareholder nominees
in the corporate proxy statement is only the first step. The formulation of
proper technical procedures for implementation are crucial. A consideration of
particular implementation problems inevitably raises questions of competing
interests. On the one hand, the procedures should be formulated so as to
encourage shareholder participation and discussion. On the other hand, the
procedures must safeguard against possible abuse and harassment of manage-
ment. "Significant interest" requirements for shareholder access to the proxy
machinery should be set at a minimal level. The potential for abuse has been
overstated as is evidenced by the experience of shareholder proposals under
Proxy Rule 14a-8. Furthermore, the corporation's interest in facilitating
considered shareholder decisions and avoiding management harassment can be
better served by limiting the maximum number of designated shareholder
nominees. With respect to limitations on the number of shareholder nominees
to be designated, the corporation should be required to include in its proxy
statement from one to two times the number of director positions up for
election. This number is neither so small as to preclude the ouster of a majority
of management's directors, nor so large as to render the proxy statement
unintelligible. The shareholder petitioning activity involved in securing desig-
nation of a nominee in the corporate proxy statement should be deemed
"solicitation" for purposes of the filing and antifraud provisions of the Proxy
Rules. The harsh impact of subjecting shareholder sponsors to the furnishing
of proxy statement information requirement of the Rules can be mitigated by
strictly limiting the "significant interest" barrier to access to the nomination
process, or completely avoided by exempting this type of solicitation altogether
from the proxy statement requirement.
The availability of discretionary proxies for management undercuts the
efficacy of this proposal by facilitating impulsive slate voting for management.
Discretionary proxies should be abolished; unmarked votes should not be
counted. If state law mandates provision for discretionary proxies, procedures
should be designed to require the shareholder to affirmatively authorize discre-
tionary use of his proxy. The proxy statement format should provide an
opportunity for the exposition of views and policies so as to facilitate share-
holder debate and informed voting. Nominees should also provide certain
biographical information, their interest in the corporation and the interests of
their sponsors. The opportunity for real shareholder choice provided by
designation of shareholder nominees is well worth its cost to the corporation.
1174 COLUMBIA LAW REVIEW
These costs are controllable, and far less expensive than the alternative of
independent proxy contests. The deadline for shareholder petitioning should
be as close to the annual shareholders meeting as permissible under the filing,
administrative and publication deadlines set by state law and the SEC.
Designation of shareholder nominees in the corporate proxy statement
may well effect greater changes than the encouragement of management
accountability. Designation of shareholder nominees provides an opportunity,
much as do shareholder proposals, for the discussion and formulation of a
corporation's social responsibility. This reform may enable shareholders to
bring to bear their views as members of the general public on the formulation
of corporate policies. Certain shareholder groups have already demonstrated a
disposition to adopt enlightened, long-range views of their interests in compel-
ling the corporation to deal with the social costs of doing business.
Venturing further into the future, designation of shareholder nominees
provides a device for rendering corporations accountable to corporate-affected
constituencies other than shareholders. While the difficulties of identifying
such groups and implementing this right are considerable, the failure of more
traditional means of improving their bargaining power may lead to their
inclusion within the corporate electorate and the designation of their nominees
in the corporate proxy statement.
Rather than restructure the corporate world, this proposal for designating
shareholder nominees in the corporate proxy statement aims to revitalize the
corporate model of management accountability through active shareholder
participatioi in the selection of the board of directors. It is hoped that greater
shareholder input in the corporate decision-making process will check unwise,
undesirable management practices and encourage greater consideration of social
costs and long-range profitability.
Robert N. Shwartg

74 Columbia Law Review

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generally free, therefore, to nominate whomever it wants for the board of

I. MANAGEMENT UNACCOUNTABILITY AND A PROPOSED REFORM

A. Corporate Model and Reality

16. See generally BERLE & MEANs, mupra note 8.

Managerialists essentially argue that management unaccountability pro-

C. External Checks on Management

2. Market Adjustment. Corporate behavior is in principle structured to

The market mechanism is equally unsatisfactory as a vehicle for share-

D. The Proposed Reform: Designation of Shareholder Nominees

understand, and a willingness to serve, the interests of a broader gamut of

43. Two recent examples of positive management reaction to unsuccessful shareholder

II. APPROACHES TOWARD ADOPTION OF DESIGNATION OF

For the corporate reformer, an analysis of the alternative approaches to

53. Id. 240.14a-8(c) (4).

If corporate reformers use the shareholder proposal approach, tactical

erally-worded shareholder proposal avoids shareholder confusion over details

C. New York Stock Exchange Listing Requirements

D. SEC Proxy Rules

Consideration of this administrative route to adoption requires an exami-

holder proposals was justified as furthering disclosure to shareholders. Manage-

Although he was referring to management's omission of shareholder proposals

87. Hearings, supra note 4, at 170.

III. PROCEDURES FOR IMPLEMENTATION OF DESIGNATION OF

Regardless of the mode of adoption of the shareholder's right to designate

"Significant interest" can be measured in terms of shareholders, 4 share-

lists upon a minimal tenure as a shareholder 0 or the authorization from, or

B. The Number of ShareholderNominees

proxy statement to be transformed into an unwieldy volume of candidates'

109. See notes 1-5 and accompanying text supra.

C. ShareholderPetitioningfor Designationas Solicitation

Wherever state law permits, the discretionary proxy system should be

IV. A STEP TOWARD CORPORATE SOcIAL RESPONSIBILITY

A. Shareholders as Advocates of Corporate Social Responsibility

Profit maximization is fully consistent with corporate social responsibilities

B. A Means for Expanding the Corporate Constituency

166. Ratner, supra note 30, at 32.

profit prospects or social responsibilities. Enfranchisement of the general

The designation of shareholder nominees in the corporate proxy statement

and practicability. Adoption through the shareholder proposal approach, while

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